ESM3520 - Managed Service Companies (MSC): MSC Provider involved with the company

Simply because a person is an MSC Provider does not necessarily mean that their client companies are Managed Service Companies.

HMRC is aware that there is a market for specialist service providers providing corporate solutions to workers genuinely in business on their own account. Whilst such specialist providers may be MSC Providers, it is important to remember that a key issue is whether the services provided constitute being involved with the client company. To be an MSC, in addition to fulfilling the first three criterion in section 61B (1) of the legislation, the MSC Provider or an associate (see ESM3525) must be “involved with” the client company.

Even where some client companies are Managed Service Companies because an MSC Provider (or their associate) is involved with those companies, it does not necessarily follow that all client companies are MSCs if the relationship between the MSC Provider/associate and their clients is demonstrably different.

However, the Financial Secretary to HM Treasury made very clear in Parliament on 15 May 2007 that HMRC’s approach to claims that MSC Provider (or associate)/client company relationships are individually unique: “Where it is clearly a standardised product constituting the MSC Provider being involved with client companies, it (HMRC) will take the starting view that all client companies are MSCs. The onus will then be on the individual companies to demonstrate no involvement.”

“Involved” is defined in the legislation by reference to any one of five activities:

First activity - that of benefiting financially on an ongoing basis from the provision of the services of the individual who provides those services through an MSC. This recognises that fees charged to companies by professionals do not normally have regard to the ability of the workers in the company to generate income: the presumption is that if the company retains the services of a professional, fees will be paid. These will usually vary with the professional services provided and not in relation to the income/profits of the business. (However, see below: indicators of services that would constitute being involved in all circumstances: if the professional services provided are directly linked to the worker’s activity, then that would constitute benefiting financially on an ongoing basis from the provision of the services of the individual.)

The above is different, for example, from the person providing services to a company who structures their financial relationship with the company in such a way that they directly link their fee payment to the workers income generation.

Second activity - that of influencing or controlling the provision of the services of the worker. The (often compulsory) provision of an engagement contract, dictating /determining the terms under which the worker provides their services or is to be remunerated, are just some examples of exercising influence or control over the worker’s provision of their services. Such influence or control is not indicative of a relationship between a Provider and a person genuinely in business on their own account.

Third activity - that of influencing or controlling the way in which payments to the worker or an associate are made. The company’s officers should determine how the company distributes its profits. The distribution of profits which conform to a standardised product over which, in reality, the worker as director has little to no control or influence, is an example of influence or control by the person providing that standardised product.

Fourth activity - that of influencing or controlling the company’s finances or any of its activities. A company’s officers should, independently of any external influence, determine how the company, as a separate legal entity, and its finances, are administered. Such decisions should have regard to all the relevant factors pertinent to the company and to the company officers’ legal obligations. Where there is no such independence, and that is not simply a matter of presenting illusions by some structural changes, HMRC’s view is that both the company and its finances are being influenced and controlled.

Fifth activity - that of giving or promoting an undertaking to make good any tax loss. Prior to April 2007, the typical MSC scheme offered the client an “IR35 proof” model. Sometimes that came with insurance, with the guarantee that if HMRC successfully challenged the IR35 proof status of the company, there would be no financial consequence for company or worker.

Where subsequent to April 2007, an MSC Provider or an associate either offers insurance against the tax/NIC liabilities arising under the MSC legislation, IR35, or indeed any other provision of the Tax Acts or National Insurance legislation, they will be involved with those client service companies to which they either offer, or promote, such insurance.

Meaning of “influences”

In this context, “influences” does not mean the provision of advice. The Financial Secretary to HM Treasury said in Parliament on 15 May 2007: “there is a distinct difference…..between a person who provides independent, tailored advice to a client, who is then able to consider that advice before accepting it or rejecting it, and the person who simply supplies a client with a standard solution or product that the client accepts.”

The fact that an advisor advises a client to incorporate does not in itself constitute “influences”. The advice to incorporate needs to be considered in the wider context of the advice to the client, i.e. whether it comprises part of truly tailored advice or in reality constitutes part of a standard product.

In determining whether an MSC Provider or their associate is exercising influence, HMRC will consider all factors in the Provider (or associate)/client relationship and will not accept solely documentation, statutory or otherwise, as definitive proof as to the true nature of the relationship between Provider (or associate) and client.

Meaning of “controls”

The word control takes its normal usage meaning. Following the publication of the Consultation Document “Tackling Managed Service Companies” and draft legislation at the Pre Budget Report 2007, HMRC saw an attempt to circumvent the draft legislation by structural changes: principally the setting up of new companies and the setting up of new company bank accounts. In determining who is exercising true control, HMRC will look beyond structural arrangements and documentation and consider all factors indicative of true control, including the level of understanding of all relevant parties in the arrangements which they are said to control.

What services are considered to comprise being involved and which are not?

In many cases, it is not a simple matter of saying whether a particular service constitutes being involved; rather it is necessary to look at the circumstances, in totality, under which a service is provided. For example, setting up a company for a client as part of a tailored advice would not constitute being involved. However, if the setting up of a company was simply part of a standard non-tailored product, then it is highly likely that setting up a company would constitute being involved.

Indicators of services that would generally not constitute being involved:

  • Managing company formation and set up

If such an activity is undertaken at the request of the client following receipt of tailored advice and is not as part of a standardised product, then it does not constitute being involved.

  • Acting as the client company’s Registered Office

If this is done at the request of the client following receipt of tailored advice and is not as part of a standardised product, then it does not constitute being involved.

  • Registering companies for VAT, CT, and PAYE. This is an administration function and does not constitute being involved
  • Preparing VAT, CT, and PAYE returns. If such activities are undertaken at the request of the client following receipt of tailored advice and are not as part of a standardised product, then they do not constitute being involved

Providing advice on whether Chapter 8 ITEPA (IR35) applies to a particular engagement.

Such advice does not constitute being involved where:

  • The Service Provider has had no involvement whatsoever, directly or indirectly, in the engagement contract with any of the parties in the contractual chain; and
  • There is verifiable evidence that the Service Provider, in addition to considering the engagement contract, considers fully the actual terms and conditions under which the client is engaged; and
  • There is verifiable evidence that the Service Provider has challenged inconsistencies in information provided by any party; and

  • The Service Provider extends full co-operation to HMRC when so requested in order to determine the accuracy of the Provider’s processes.

  • Advising on a remuneration package

Providing advice to a client does not constitute being involved. But HMRC will consider very carefully whether advice given constitutes genuine tailored advice or in effect constitutes a standardised product. In determining the nature of such advice, HMRC will consider all factors including the nature of advice given to other clients.

  • Advising on expense claims

Providing advice to a client does not constitute being involved. But HMRC will consider very carefully whether advice given constitutes genuine tailored advice or in effect constitutes a standardised product. In determining the nature of such advice, HMRC will consider all factors including the nature of advice given to other clients.

  • Preparing invoices

If invoices are prepared at the request of the client following receipt of tailored advice, and relate to services over which the MSC Provider has neither influence nor control, and are not prepared as part of a standardised product, then they do not constitute being involved.

  • Submitting invoices to clients of a company

See above comments.

  • Operating a payroll

If the payroll is operated based on employment income figures notified by the client following receipt of tailored advice and is not as part of a standardised income routing product, then it does not constitute being involved

  • Preparing weekly/monthly payslips and producing employers’ payroll returns, such as P35 & P11Ds

See above comments.

  • Preparing management accounts and financial statements

These activities, if provided as part of a tailored service to the client, do not constitute being involved.

  • Providing support on secretarial matters, such as drafting of minutes and preparing annual returns

These activities, if provided as part of a tailored service to the client, and undertaken on the instructions of the client, do not constitute being involved,

  • Providing group insurances (including employers and public liability)

The provision or promotion of insurance services, except for insurance to make good a tax loss, does not constitute being involved.

Indicators of services that would constitute being involved in all circumstances:

  • Providing a standardised corporate solution package, other than one in which all of the income of all of the persons working through the corporate body, is treated as employment income
  • Being a director of client companies
  • Being the company secretary of client companies
  • Managing the company bank account or the company’s finances through a separate account (but see below regarding holding tax balances)
  • Charging fees based on the number of invoices raised/payroll runs. Such a method of charging is indirectly linked to the provision of the services of the worker on an ongoing basis. If the client is being provided with a truly tailored package, HMRC considers that the fee charging arrangement can reflect the individual client needs without being linked (albeit indirectly) to the provision of the services of the worker.

Indicators of services that may constitute being involved, depending on the scope of the activity:

  • Maintaining cash balances on behalf of PSCs to meet CT, PAYE and VAT liabilities

Whether maintaining such balances constitutes being involved will depend on the circumstances of the case including the precise mechanics of how company funds are transferred, the degree of control truly exercised by the client, and what happens to interest accumulated in such holding accounts. For example, if such balances are under the advisor’s control and the interest (wholly or partly) is retained by them, then it is more likely that the advisor is involved.

N.B. Balances held in respect of liabilities incurred up to 5 April 2007 and how such balances were accumulated will not be considered in terms of determining whether an MSC Provider is involved with their client. This is subject to the proviso that such balances must be repayable to the client company, on demand, if the client company so demands.

  • Paying CT, PAYE & VAT liabilities on behalf of the PSCs using the cash balances held

See above comments.