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Published on Mar 30, 2007
Most freelancers
should be aware that in the budget HM Treasury significantly changed the
definitions 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 freelancers understand how the legislation could apply to them.
What is a Managed Service Company?
Essentially
the definition applies to all freelancers contracting via their own Limited
Company, 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 “MSC Provider”.
Freelancers
need to consider if their accountant provides their services in the context of
“professional capacity”. If they do, the
legislation does not apply to the freelancer’s Limited Company.
Recognising an MSC Provider
Freelancers
contracting through 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.
Freelancers
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:
b) Influences
or controls the provision of those services,
An MSC
Provider could be involved if they:
c) Influences
or controls the way in which payments to the individual (or associates of the
individual) are made,
An MSC
Provider could be involved if they:
d) Influences
or controls the company’s finances or any of its activities, or
An MSC
Provider could be involved if they:
e) Gives
or promotes an undertaking to make good any tax loss.
An MSC
Provider could be involved if they:
Conclusion
Freelancers
working through their own Limited Company need to know if their accountant is
supplying their services in a Professional Capacity.
To do
this, freelancers should ensure they:
If you
require further details, there is a new Guide on the MSC Regulations available which
explains “How not to be an MSC”. You can
download it for free at www.manager.co.uk/msc.
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