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:

• Receive a percentage fee of the income of the Managed Service Company or individual.
• Receive a fee when the worker provides the services, and does not receive a fee when the worker does not provide the service.
• Invoice out for services of an individual and then pays this income to the Limited Company, less its administration fee.

b) Influences or controls the provision of those services,

An MSC Provider could be involved if they:

• Arrange the contracts for service between the MSC Provider and the staffing company/end- 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 freelancer attends the worksite or enters into any dispute resolution.

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:

• Have control over the company bank account, or access to the company bank account, or makes any payments.
• Calculate Payroll, Dividend and Expenses from the income of the MSC, and then instructs the freelancer on what to pay themselves from the company bank account.

d) Influences or controls the company’s finances or any of its activities, or

An MSC Provider could be involved if they:

• Calculate how much a freelancer has earned from an invoice, and instructs the freelancer on how much to pay themselves from their company.

e) Gives or promotes an undertaking to make good any tax loss.

An MSC Provider could be involved if they:

• Introduce a freelancer, and/or their company, to an insurance, scheme, guarantee or any form of protection from the loss of the payment of tax that would result to a freelancer where they are challenged successfully by HMRC.  e.g. IR35, VAT and PAYE insurance.

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:

1. Know their accountant and the services they provide
2. Recognise what an MSC Provider is
3. Accept responsibility for their Limited Company
4. Instruct an accountant acting in a professional capacity
5. Ultimately make the final decisions

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.