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Managed Service Companies

Budget Note 46 confirms that, as announced in the Pre Budget Report, legislation will be introduced in the Finance Bill 2007 to tackle Managed Service Companies (“MSCs”). This provides that all income received by individuals providing services to an end user through a MSC will be treated as employment income, regardless of how the services are provided. As a result, the MSC will have to account for PAYE and NIC on all payments received by individuals.

Budget Note 46 provides that there will be changes to the draft legislation, that has already been published, in terms of which companies will be caught.

The focus will now be on looking at the nature and characteristics of the business of the MSC provider in order to determine whether it constitutes an MSC. An MSC provider will include businesses which are involved and promoting or facilitating the use of companies to provide the services of individuals.

In addition, the definition will contain exclusions for employment agencies and employment businesses which do not influence or control the finances of the companies or the way in which the individuals are paid. Those providing professional accountancy and legal services will be excluded. The legislation will also include the power to exclude other businesses from being treated as an MSC provider where a case can be made.

Where an MSC incurs a PAYE/Class 1 NIC debt and that cannot be recovered from the company, HMRC will be able to transfer the debt to certain specified persons, primarily the MSC’s director and the MSC provider.

For the purposes of travel and subsistence expenses, individuals will be treated as if they were employed by the end user. This means that the cost of travel to the place where they perform their duties will not be deductible for income tax and NIC purposes.