Revenue clarifies Managed Services Companies legislation

Contractors can expect recruitment agencies to ask fewer questions about their business models thanks to clarification on MSC rules from HM Revenue & Customs.

Pre-empting official policy to be posted on its website, HMRC said contractors who run limited companies when joining an agency serve to protect it from the transfer of MSC debts.

In other words, PAYE and national insurance tax would not be sought from an employment agency if a contractor using a MSC initially engaged that agency as a limited company.

In these circumstances, HMRC would not deem the agency to had 'encouraged' or been 'actively involved' in the worker supplying their services through the particular company.

The agency would therefore not be caught by the debt transfer rules, just as, theoretically, an end-client would also be exempt, based on the worker's initial structure of their company.

Explaining the thinking behind the policy, HMRC said it recognises the difficulties agencies are having in trying to identify whether a contractor is operating through an MSC.

Robin Wythes, of HMRC, told a recruitment law seminar the policy is consistent with the aims of the legislation, which is not designed to penalise recruitment companies.

This, however, is the law's intention only when the agency has not encouraged a worker using their services to trade through a specific company, Mr Wythes further told the seminar.

Adrian Marlowe, managing director of Lawspeed, which hosted the seminar, said that HMRC specified there is no encouragement if the MSC company is already in existence at the outset.

He said: "The limited company clarification should also help contractors already operating through limited companies when they registered with an employment business, as there will be no longer any need for the employment business to ask lots of MSC related status questions."

The PCG has welcomed the clarification, which is soon expected to be officially released in new guidance on HMRC's website.

John Brazier, the group's managing director, said: "This means that agencies don't need to ask any questions of contractors who already have their own limited companies once the company's name is supplied and it should ease the barrage of requests for information that agencies send to our members simply to protect themselves from debt transfers."

HMRC has also rejected calls for an accreditation scheme of for MSC providers, saying the tax authority lacks enough resources.

But it is considering a scheme whereby MSC providers could be audited by third parties applying a published HMRC Audit Standard.

Giving an assurance of whether or not the MSC legislation applies would allow recruitment agencies to safely engage outfits that have been reviewed applying the Audit Standard.

To meet the standard, a company would be reviewed to confirm that the MSC provider's client companies are not Managed Service Companies (MSCs).

"Any such scheme would be of great benefit to the industry," Mr Marlowe said.

"However as things currently stand questions remain as to whether any scheme will definitely go ahead, and if so what the ingredients would be. This will no doubt involve a tricky balancing act between providing a level playing field for all providers operating in this area, and the government achieving its objectives under the MSC legislation."

Editor's Note: Further reading here on Managed Service Company legislation.