What is MSC?
The MSC legislation was brought in to close a loophole some service providers were exploiting. The composite service now defined as a managed service solution was being used by a minority to try and disguise or hide the true IR35 status of contractors using it. In doing this, they would tax the candidates as if they had their own limited company (paying out dividends) instead of taxing them as employees. This is the key issue HMRC created the MSC legislation to combat.
The key points that define a Managed Service Provider (MSP):
Benefits financially on an ongoing basis from the provision of the services of the individual:
- Receive a percentage fee of the contract income
- Receive a fee only when the contractor works
- Invoices out for services of an individual and then pays this income to the limited company.
Influences or controls the provision of those services:
- Arrange the contracts for service between the service and the agency or client.
- Are involved with the arrangement of the contracts for service, the negotiation of rates and/or terms of the contract.
- Are involved in ensuring the contractor completes the work or enters into any dispute resolution.
Influences or controls the way in which payments to the individual (or associates of the individual) are made:
- Have control over or access to the company bank account, or makes any payments for the company.
- Calculate Payroll, Dividend and Expenses from the contract income and then instructs the contractor on what to pay themselves from the company bank account.
Influences or controls the company’s finances or any of its activities:
- Calculate how much a contractor has earned from an invoice, and instructs the contractor on how much to pay themselves from their company.
Gives or promotes an undertaking to make good any tax loss:
- Introducing the contractor or company to an insurance, scheme, guarantee or other form of protection that would safeguard them against the additional payment of tax due to a successfully challenge by HMRC, e.g. IR35, VAT and PAYE insurance.
The biggest issue HMRC faced once this legislation was released was enforcing it.
To aid them do this they made an additional to the MSC legislation “Debt Transfer”. For full guidance on the MSC legislation visit the HMRC website.
This section of the MSC legislation gives HMRC the powers to chase third parties for any non payment of tax by the candidate. Therefore, if one of your contractors is using an MSP to run a service for them, such as a limited company, and this contractor is deemed not to have paid the correct level of tax (remember if an MSP is involved in the candidates company they should pay PAYE tax on all their income) you as the agency or client can be chased for the difference.
To be deemed as a third party you must know, or be reasonably expected to know about the service being supplied. This includes agencies that have either a preferred supplier list or an exclusive arrangement with a scheme provider. This also includes employers who outsource the work to contractors directly.