Are you affected by MSC legislation?

Some IT contractors will need to comply with the MSC legislation that comes into effect in July. So who does it apply to and what do you need to do?

Since the chancellor's Budget announcement confirming the definition of managed service companies (MSCs), IT contractors across the UK have been reviewing their existing pay and accountancy arrangements to ensure they stay within the law.

The new legislation, part of the Finance Bill which is due to get Royal Assent in July 2007, includes new measures to tackle what could be labelled as "tax avoidance schemes".

Who does it affect?

As a contractor you will want to know if you are safe to continue using your existing accounting and payroll provider.

If you are working through an umbrella or a structure where all income is taxed under Paye then the new legislation does not affect you.

If you think that you are already using a personal service company, and you receive part of your income as a dividend, ask yourself the following questions:

● Are you the director of your company?

● Do you have a company bank account and are you the signatory?

● Do you control the way that money is drawn from the account and do you decide the amounts and timings of withdrawals?

● Does your service provider offer only accountancy and legal services?

If the answer is yes to all of these questions, then you are a personal service company and you are not caught under the new legislation - again you are safe.

If the answer to any of the questions is no then you may fall foul of the new legislation and may want to consider seeking advice about switching to another service provider.

So it is worth looking in more detail at how service providers must operate to comply with the new legislation.

How is an MSC defined?

A service provider is "a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals".

This is the Treasury's first part of how to define an MSC scheme provider. But the government does not intend to define everyone providing a service to contractors as an MSC scheme provider.

In a recent parliamentary debate on the bill, John Healey, financial secretary to the Treasury, said, "Accountants, tax advisers, lawyers and company secretaries who provide advice or other professional services to companies and individual clients are not in the business of promoting or facilitating the use of companies to provide the services of individuals."

So it is acceptable for service providers to advise contractors about the best financial structure for their company. But there is a fine line between giving advice and promoting a tax-saving scheme. Healey went on to say that "mass-marketed schemes are almost always promoted on the basis that the worker will pay less tax".

He quoted websites of MSC providers whose stated aim was "to increase the take-home pay of contractors".

It is worth knowing that accountancy service providers who continue to promote tax saving schemes on their website or in their marketing literature will attract the attention of the Treasury.

Will it affect me?

An important question to ask yourself is whether your accountancy service provider is "involved" with your company.

Under the MSC legislation, a service provider is involved with a company if it "influences or controls" the company's affairs.

This could be very widely interpreted by the courts, but Healey said that professional advisers are not regarded as "involved" in the company.

So a service provider is "involved" if it tells you as a contractor to take decisions in a certain way, or takes decisions on your behalf, but not if it advises you on the pros and cons of business decisions and lets you decide.

You should still be in control of, for example, decisions on bank account withdrawals. If you simply hand over responsibility for running your company to a third-party, be it an accountant, lawyer or other service provider, you will fall foul of the new legislation.

But if you as a contractor seek advice on operating your business and act on that advice, then you will be seen as running a personal service company, which is allowed under the new legislation.

So for example, you should still be the director of the company and remain the signatory on your bank account.

What should I do now?

It is worth remembering that the MSC legislation has not yet been finalised and it could change in the final committee stages of parliament before it gets Royal Assent.

However, the legislation is unlikely to change, and so if you are a contractor operating through a personal service company, you need to make some key decisions now on sourcing support services.

Consider your own personal circumstances to ensure you do not fall foul of the MSC legislation. It is no longer simply a question of allowing a service provider to dictate how you should operate. As sole director of the personal service company, you must assume full responsibility for which service provider you engage to provide services.

Your approach to the MSC legislation should be the same as your approach to IR35 - compliance is key.

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