Managed Service Companies (MSC) - New Regulations

From 6th April 2007 the Government introduced new tax rules relating to Managed Service Companies (MSC). Full guidance on the legislation is published by HMRC, details of which are given under Q13. This section of the REC Guide is a brief explanation for REC Members based on that guidance.
The justification for this legislation is the Government’s view that workers who work through MSC are invariably not in business on their own account, in other words they are not self employed for tax purposes. However, they are paid in a way which minimises the amount of PAYE tax and National Insurance Contributions (NIC) they are liable for. They do this by paying the workers a salary at the national minimum wage (NMW) and the balance by way of dividends.
IR35 legislation introduced in 1999 was supposed to ensure that those who worked through a limited company, of any description, and who were not genuinely self employed would be liable for paying PAYE and NIC on all income earned from providing their personal services. However the IR35 legislation has not been fully effective as a means of recovering tax shortfalls because it relies on an interpretation of the complex tests for self employment. Therefore, the Government enacted the MSC legislation in a bid to collect the £350 million of tax it believes is slipping through the net under the name of bogus “self employment”.
The new legislation requires a MSC to deduct PAYE tax and NIC on all earnings paid to workers and to apply the same rules for tax relief on travel expenses as apply to other employees. The new legislation goes further than IR35 in that it makes it compulsory to deduct PAYE tax and NIC if a company falls within the definition of a MSC. Further, if a MSC fails to deduct any or the full amount of PAYE tax and NIC, HMRC have powers to recover this shortfall from third parties, which can include employment businesses (from 6th January 2008). See Q4 & Q5 below. * Article from the REC website.

For the above reasons G & G Recruitment do not favour or recommend any MSC. Simply we can provide weblinks and contact details should contractors ask us for this information. If you have any more questions on this, please do contact us.