Contractors, beware! It seems that HMRC has been sending letters out to contractors claiming they should be classified as MSCs instead of PSCs.
Contractors' use of a managed service company will be treated like any other employment relationship. HMRC has started investigating PSC’s for the MSC legislation, which means you will have to pay income tax and NICs (National Insurance Contribution) like other employees.
Since the MSC legislation has the “debt transfer” clause, it implies agencies and accountants can be at risk of a managed services company’s neglected tax and NIC bills. This can occur on the off chance that the contractor’s managed service company doesn't have the money to pay off the liabilities or has been dissolved.
This legislation was first presented in 2007. The goal was to eliminate all the tax advantages of running a limited company, like getting a low salary and high dividends to increase the take home income.
In any case, the rule will not impact umbrella contractors as HMRC have confirmed that genuine umbrella solutions fall outside of the scope of the Managed Service Company Legislation.
Let’s understand the meaning of a managed service company:
A managed service company provider is described as “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.”
As per HMRC’s guidance on the MSC legislation. A managed service company must satisfy four conditions:
- The company’s business must provide a contractor’s personal services to end-user clients or to a client via an agency.
- The contractor must be paid directly or indirectly “equal to the greater part of the sums” of the fees from the client or agency; i.e. the contractor receives more than the managed service company takes in fees and overheads.
- The contractor's amount paid is greater than what they would have earned if the managed service company had employed them.
- There must be someone who is the “MSC Provider”, and that person must be involved with the managed service company.
The result of the MSC legislation on contractors
The government is cracking down on contractors who use personal service companies. This is a new attack to push away contractors and their advisors from using or suggesting a Limited company for contracting.
The MSC legislation is different from IR35, which means that a contractor’s contract could be outside of the scope, but they will still pay tax like an employee if working through a managed service company.
What can you do?
As per David Kirk (a specialist tax consultant):
- The deadline for appealing a decision made by the HMRC is within 30 days of receiving notice. If you miss this window, it may be too late to bring up your case again and get back what's rightfully yours!
- Since you have paid a lot of tax – something that the Revenue will not be keen to remind you of. If they are asking for £50,000, they need to consider that you have probably already paid them about £35,000.
- Check if you have tax fee protection insurance and whether it covers you for this. This might help, but the chances are that while it will cover fees for challenging the Revenue, it will not help you get the tax offset you have already paid.
- You can't let your accountant fight this for you. Though, they are compromised and have their interests to look after.
- Tie up with others who are suffering from the same situation: these tax raids are quite costly to fight alone.
At Reliasys, we offer Full employment rights/Statutory Benefits, employee perks, business insurance and more to all the employees working with us. You will be exempt from a managed service company legislation when working through our PAYE solution. Contact our experts to know more!
Call us on 020 3500 2615
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