Budget 2007 and Managed Service Companies

Budget Note 46 (here - Section 46) confirms that the MSC legislation will be introduced in the Finance Bill 2007 (as announced in the Pre-Budget Report).

The legislation will ensure that income received by individuals who provide services to an end user (via an MSC) will be treated as employment income.

Therefore, the MSC will have to account for Income Tax (PAYE) and National Insurance on all payments received by individuals using the Company.

Budget Note 46 provides that there will be changes to the draft legislation, in terms of defining which structures will be caught.

Phil Richards from Manager Group told Bytestart: “After speaking with HMRC representatives it was confirmed that the amended draft legislation should be available on Thursday 22nd March. I was disappointed that they were unable to publish the actual draft legislation issuing only a Budget Note "BN46” describing what the new legislation would do.”

Once this is published Manager Group will analyse it closely, but for now we know the following:

Date announced for the start of the Debt Transfer Provisions

There was positive news that the debt transfer provisions have been delayed for all third parties including recruitment agencies until 6th January 2008.

Definition of a Managed Service Company an “MSC” and an “MSC Provider”

The Managed Service Company rules were clarified in the Budget Release BN46 which outlined the definition of a Managed Service Company (MSC) as a company that is an intermediary within the IR35 rules

(Ltd Company used by a worker to provide its services), and is provided by an MSC Provider.

The legislation will define an MSC by the characteristics of the MSC Provider, the company that provides the MSC to the worker.

It is important to note that under these modified rules ALL the intermediary companies (MSC’s) provided by an MSC Provider will be caught under the rules and have to apply PAYE on all income, and exclude travel expenses for that assignment.

The only guidance so far as to the definition of an MSC Provider is as follows:

“Broadly, an MSC provider includes businesses which are involved in promoting or facilitating the use of companies to provide the services of individuals”

But importantly there are exceptions to this broad rule which are:-

• For employment agencies and employment businesses which do not influence or control the finances of the companies or the way in which payments to individuals are paid.
• There will also be exclusion for people providing professional accountancy and legal services.