Managed Service Company Legislation effective April 2007

Are you aware of the new Managed Service Company Legislation?

If you're a contractor with a limited company, the new legislation may affect the way you work. From April 2007 new legislation deems Managed Service Company's as illegal. The legislation does not affect those working via an umbrella or Personal Service Company (PSC).

The MSC Legislation 2007

In March 2007 the Chancellor announced legislation that effectively made MSC providers illegal unless they ensured that their MSC companies and client contractors paid full tax and national insurance on their earnings. It also prevented MSC'S claiming travel to and from work and other related expenses. This has spelt the effective end of the MSC and the composite company including the Multi share class Single person company as there is no longer a financial advantage to use it as corporate vehicle to contract through.

In addition the definition of a MSC was widened to include organisations providing services to Personal service companies (PSC'S) whereby their services would mean that the PSC receiving the services became an MSC AND AS A RESULT WOULD HAVE TO PAY FULL TAX AND NATIONAL INSURANCE ON ALL EARNINGS.

Finally the debt transfer provision where the Inland Revenue could pursue third parties judged to be involved in advising or providing these services was delayed to January 1 st 2008, but after this agencies, intermediaries and end user clients could be pursued to provide any unpaid tax and national insurance for SPC'S they were judged to have an association with. This is expected to be passed as Law in July 2007.

So what have been the effects

• Contractors are moving either into PAYEE UMBRELLA schemes or seeking to set up their own PSC.
• Agencies are preferring contractors using PAYEE umbrella solutions or PSC's set up and serviced through a legitimate professional firm of Qualified / Chartered Accountants (not ex-MSC providers).
• PSC'S should only be set up through Qualified / Chartered Accountancy firms.

CONTRACTORS

Will only gain a financial advantage from Contracting through a PSC if the company is, clear of any organisation that may cause it to become an MSC, Managed and controlled by the owners and directors not a third party, Serviced by an independent Qualified Accountancy practice, and is operating contractually outside of IR35. Otherwise it will have to pay full tax and national insurance on its income.

AGENCIES

Will wish to avoid any debt transfer through using either Contractors who use a recognised PAYE Umbrella payroll or PSC'S that are set up and serviced correctly through Chartered Accountants so that they pay all taxes due. They will still wish to encourage talented freelancers in the IT industry to work through them but will wish to minimise the risks of debt transfer.