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Most contractors should be aware that in the 2007 Budget, HMRC significantly changed the definition of a Managed Service Company since the consultation document "Tackling Managed Service Companies" was published in early December 2006.
This article attempts to explain the definitions in a plain English and practical way to help contractors understand how the legislation could apply to them.
What is a Managed Service Company?
Essentially the definition applies to all contractors working via their own limited companies, who receive income subject to less tax than if they were employed and who use an 'MSC Provider'.
A PAYE umbrella company is not caught as they pay workers the same amount of money as if they were in employment.
Accountants working in a "professional capacity" excluded
The legislation states that companies providing legal or
accountancy services in a professional capacity are exempt from the definition of an 'MSC Provider'.
Contractors need to consider if their accountant provides their services in the context of a "professional capacity". If they do, the legislation does not apply to the contractor's limited company.
Recognising an MSC Provider
Contractors working via a limited company need to be able to recognise an 'MSC Provider' who is "involved with the company" under the published legislation.
According to the legislation there are five tests that define an 'MSC Provider' being "involved with the company" and of which only one has to be relevant for the
legislation to apply.
Contractors can look at the following practical elements to assess if an 'MSC Provider' is "involved with the company":
a) Benefits financially on an ongoing basis from the provision of the services of the individual.
An MSC Provider could be involved if they:
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