Managed Service Company Legislation- Should I Be Worried?

If you keep up to date with the latest HMRC or contractor goings on, you may have heard recently about HMRC targeting contractors with large tax bills, having accused their accountant of being a Managed Service Company (MSC). So, what is an MSC, and should you be worried?

What is a Managed Service Company?

Before 2007, MSCs were a popular alternative for contractors to setting up a limited company. Essentially, they worked in a way that meant that the contractor got the tax benefits of working through a limited company, without the responsibility, which was left to the MSC service provider. An MSC will be involved in the company, possibly benefiting financially from it’s successes, as well as influencing/controlling the running of the business and provision of the services. Before 2007, it was common place for these MSCs to raise invoices on behalf of their clients and control their company bank accounts issuing salary/dividends to them.

However, in April 2007, MSC legislation was introduced to outlaw this practice, with anyone deemed to be working under an MSC to be subject to PAYE tax and National Insurance as though they were working as a payrolled employee.

So, what’s happened now?

As a result of this legislation, previously defined MSCs had to change their ways (usually converting to act as an umbrella company) or risk being put out of business. And most did. However, in March this year, apparently out of the blue, contractors using the accountants Churchill Knight and Boox started receiving tax demands from HMRC, accusing them of being Managed Service Companies and the accountants of being Managed Service Providers, something which both accountancy firms deny strongly, and are appealing against.

Should I be worried that my company may be seen as an MSC?

It is very important that when it comes to your limited company, you are the one that is in control. Your accountant should not have access to your bank account, they shouldn’t be raising invoices on your behalf nor negotiating terms of your contract for you (or receive any sort of commission for contracts that you take on).

Depending on the outcome of the Churchill Knight & Boox probes, HMRC may well target other contractors and accountancy firms and agencies in the future. However, here at PaperRocket Accounting, we are confident that we would not be deemed to be a MSC provider. We ensure that we never do anything that could be interpreted as helping to run, or influence our client’s businesses.

PaperRocket Accounting provide accounting and tax services to professional contractors, freelancers, and small businesses working in the UK.

We offer our clients a flexible choice of fixed fee monthly packages which cover all of their accounting and tax needs (so no hidden costs or surprise bills!). All of our accounting packages include a monthly subscription for a cloud accounting software subscription provided by the awarding winning FreeAgent.

Each of our clients is given their own dedicated qualified accountant with unlimited access in person, telephone, or by email.

We pride ourselves on our client satisfaction and customer service and were awarded ‘Best Contractor Accountancy’ firm 2020 in The Contracting Awards and ‘Welwyn Hatfield Business of the Year 2019’ in the SME Hertfordshire awards.

To find out how we can help you please get in touch now.

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