Managed Service Companies

The current target

This is the current worry. Basically a managed service company (MSC) is one where a third party is performing management functions such that the owner, and worker, is not fully managing his own company. The result is that all payments to the owner/worker as reclassified as wages and all the tax efficiency is lost. In order to be classified as an MSC there has to be an MSC provider. An MSC provider is a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.

While this was supposed to exclude professional advisors (like Accountants) a few have been dragged into the net where it can be shown they are "involved" with the client company. Involved is a vague term but seems to include influencing the manner in which payments are made, profiting from the company income (eg fees based on a percentage), providing a way to "make good" any tax loss, influencing the terms of business or managing the finances.

There are currently two big cases of accountants who have been challenged as MSC providers by HMRC, Boox and Churchill Knight. A quick google will find lots of discussion of these, particularly on Contractor UK.

IR35

Judicial review

This was a while ago now and although the action was lost some important points came out of the judges' ruling. The judicial review verdict included some important points which must be included in a consideration of whether a contract is caught or not. The most important of these is that the judge thought the Revenue guidance was unfair. Also the Inland Revenue lawyers stated that is was difficult to apply the case law to IT workers. The judge clarified a number of the traditional criteria used in determining employment status. These are:

i) Whether the service provider is in business on his own account must be a central consideration. That is whether the service provider has, prior to the engagement performed or is, simultaneously with that engagement performing or will, subsequently after the termination of the engagement, performing services for others.

ii) It is inappropriate that it is only where a contract in the agency's standard terms is for less than one month that the status position will be considered on a case by case basis.

iii) That it cannot be right for the revenue to simply conclude that mutuality of obligation is not a relevant issue. Since there is no direct contract there can be no obligation on either party to the other but it is relevant to consider whether any obligation would be owed by the client.

iv) It is not right to make an absolute statement that the need to obtain the clients permission negates the existence of a right to make a substitution.

I shall consider each a little further in turn:

i) This is important. The judge said that consideration of a workers status must include a consideration of whether he is trading on his own account, meaning is there a trading pattern such as working on different contracts. The Revenue guidance says that status must be determined on a case by case basis ignoring any trading history. Therefore it is important in any discussion of status to include a business history such as previous, subsequent and concurrent work. It is also important to show that the business has a proper structure with things such as VAT registration, employers liability and professional indemnity insurance in place, actively seeking other work, and managing its own affairs and bank accounts.

ii) The judge said that longer contracts or those where the worker works alongside the clients employees or on the same basis as those employees are more likely to be subject to IR35. Therefore go for shorter contracts and if the work is to be extended try and break the work into discrete parts and have a separate contract for each part. Get new contracts rather than extensions to existing contracts.

iii) Mutuality of obligation (MOO) is a difficult concept but basically you want to avoid it. If there is no MOO then there can be no employment. You need to be free to decline work, such as work not within the scope of your contract. The end client should not have any obligation to find you work when your contracted work finishes. Some types of work are more likely to generate MOO than others, such as support work. Other types are less likely to generate MOO like specific task based contracts. Longer contracts are more likely to generate MOO. There is no hard rule here but beware those over 12 months. Overall it will be especially difficult for the Revenue to argue MOO exists when there is no direct contract between the worker and the end client creating any obligations from one to the other.

iv) The absence of a right to substitution has been stated to be not of itself a reason to deny a self employment exists, nor does the need to get the clients permission negate any claimed right of substitution. The logic is that as the work progresses a worker has a detailed knowledge that would be difficult to duplicate in a substitute.

Other matters have also been addressed by the judge such as lack of equipment. The judge finds it acceptable that a knowledge based worker would not have equipment and that lack of equipment is not such an obvious factor suggesting employment as it might be in a trade where equipment was a required feature of the work such as a plumber.

There are some things you need to do to improve your chances of avoiding IR35. These are to run your business in a businesslike fashion with VAT registration, insurances and the other tangible evidence of a business, actively seek work and keep records of this, look for shorter contracts and avoid open ended ones, do not extend existing contracts but get new ones, have contracts address matters of supervision and control and substitution.

And remember, those who move from contract to contract fairly regularly are more likely to escape ir35. Those who sit at one contract year after year are less likely to escape.

To read further on this download the High Court ruling from the PCG website. The relevant parts are at paragraph 48.

Origins This link is to the actual text of the latest revenue release so you can see what the government actually released in March 1999.

The important distinction to be made is between those who are genuinely self employed and those who are in disguised employment. The distinction in not a recorded in a single set of rules but has been defined over many years in case law. I have summarised some of the more relevant cases and have discussed the application of these cases in a short document.

The proposal is to tax those who provide personal services through a corporate structure under PAYE where the work they do has the features of employment rather than self employment so you won't be able to pay dividends out of such income but you will out of other income. You will still be able to pay other costs associated with the employment such as travel and pension and computer bits and those associated with the company such as accountants before paying a salary. However all of the excess arising from employments must be paid as salary in each year ended 5 April.

The proposal will relate to the relationship between an individual and the ultimate employer. That is where the relationship between you and the management of the place where you actually work.

It is not intended to change the boundary between employment and selfemployment so the existing rules can be used to make this determination. The distinction is not one which is defined in a single piece of law. It is one that has developed over the years through many court cases. The Revenue summarise this in a leaflet called IR56, my own view is that this leaflet contains a very biased view of what constitutes employment. The Inland Revenue have published some draft notes on the application of the new rules which you can find at http://www.inlandrevenue.gov.uk/ir35/draftgn.htm. These are also very biased.

The big impact on those affected is that they will pay more NI.

The proposal was effective from 6 April 2000 and applies to money received for work performed on or after that date. It does not apply to money received for work performed before 6 April 2000.

If you wish to see how we can help you please contact us at: mike@mikelewis.co.uk or at:

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Impington
Cambridge
CB24 9YX

Tel: 01223 424500

In brief...