As a Limited company director, you might have seen people talking about the MSC legislation, particularly in the context of your accountant taking actions of making decisions on your behalf. So, what is a Managed Service Company, and how does the legislation affect you?
What is a Managed Service Company?
Prior to 2007, MSC’s were promoted as a way of increasing a business owners take home pay without them taking on the responsibility of running a limited company. The model worked by allowing the business owner or contractor to be paid a basic salary and the remainder in dividends, the sole purpose of the scheme was to minimise tax liabilities.
For the MSC to exist there had to be a Managed Service Company Provider (MSCP), exerting control over the MSC. The provider was defined as a “person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.
What is the MSC Legislation?
MSC Legislation was introduced in 2007 as a way of stopping contractors and small business owners from benefitting from the tax advantages of running a limited company, without incurring any of the risks or responsibilities of being in business. The legislation effectively strips away all the tax benefits of working through the MSC by making all income subject to PAYE Tax and National Insurance where the MSC provider exerts “control or influence” over the running of an individual’s business.
The legislation states that an accountant providing accounting services during the course of their business does not ordinarily give them control or influence over their client’s business nor its finances, so typically the accountant will not be viewed by HMRC as an MSC Provider.
Imagine therefore the shock for hundreds of contractors and business owners in early 2022, when HMRC wrote to them and informed them that they showed signs of working as an MSC, raising assessments for unpaid tax and seeking to investigate their accountants.
What the courts say
Whilst the most recent assessments are being appealed and we are yet to see if the cases go to Tribunal, MSC legislation has previously been tested in court.
In Christianuyi Limited & Others v HMRC [2019] WECA Civ 474 the Court of Appeal confirmed that the Upper Tier Tribunal and First Tier Tribunal were correct in finding that a business (Costello Building Services Limited - 'Costello') which was set up to facilitate workers to provide their services via managed personal service companies was a Managed Service Company (MSC) provider.
Costello was deemed to have been exerting undue control and influence over the individual Limited companies in line with MSC provisions. They
Benefitted financially on an ongoing basis, directly from the provision of services and activities of their clients
They influenced the choice of bank account and charged a “premium” to accept payments and influenced the Ltd company’s finances by collecting funds, making tax payments, retaining funds for fees, and having access to client bank accounts
They controlled and overly influenced the way in which payments were made to the individual taxpayers.
How to be sure your accountant is not an MSCP
To protect yourself from HMRC scrutiny make sure you are not working with an MSC provider. Unless you are an accountant or tax advisor by trade, it’s unlikely you will have all the answers you need and presumably you engaged an accountant to give you professional advice on your best options. Having sought the advice be sure to make your own decisions and stay in control of your business; after all, that’s one of the key reasons you set it up in the first place. Use the information provided as direction and be sure to be clear on your own decisions.
There are some practical ways you can also spot a potential MSCP and if you feel your accountant is acting in this manner, it would be a good idea to check in with them and ask them about the due diligence they have undertaken to ensure they are not seen as an MSCP.
If your accountant charges fees in line with your turnover level, your client numbers or takes a % of your income, then this may indicate they are benefitting directly from your business and indicates a potential MSC. Orange Genie Accountancy’s fees are based on the services we provide, irrespective of the value, volume, or amount of business you do.
If your accountant requires access to your business bank account, makes payments on your behalf, retains monies you earn to pay taxes or their own fees, this can indicate undue control of your finances, again a potential sign of an MSC. Orange Genie Accountancy will never ask to be a signatory on your bank account or to have access in any way. You choose who you bank with, and you control the account.
If your accountant tells you the level of salary and dividend you can take each year, they may be exerting too much control over the business finances. Orange Genie Accountancy will explain to all clients the tax efficient options available to taking salary and dividends, depending on IR35 status and personal circumstances. Each client will be asked to confirm to their accountant their salary requirements at the beginning of each tax year.
Your accountant should have no control over how you deliver your services, what you charge, how you negotiate your terms etc. You may during your relationship seek advice on pricing, profitability projections, scenario planning and the impact of certain commercial decisions on your finances but having “crunched the numbers” the accountant will stand back, and the company’s management must make the final decisions.
If your accountant promotes and insists that you purchase tax investigation insurance, particularly in relation to IR35, then this may indicate they are an MSCP. The promotion of the use of a Ltd company for tax advantages that can be protected by an insurance policy flies against the spirit of the legislation and will most certainly raise eyebrows with HMRC.
Choosing your professional advisors and accountants is very personal and there will be a lot of factors to consider. Appointing an accountant will be one of the most important decisions so make sure you are aware of MSC legislation and avoid the potential pitfalls.
Read our guide on how to choose a good accountant.