When starting out on your own it’s key to know what company structure will best suit you and your business, whether that be as a sole trader, limited company, or working through an umbrella company, these three are the most used methods of legitimate trading in the UK.
However, in 2022, contractors reported receiving a letter from HM Revenue and Customs (HMRC) claiming that their business showed signs they may be working as an MSC. Many hadn’t even heard of the term MSC! SO let us summaries some key terminology before we continue. The following stands for. . .
- MSC – Managed Service Company
- MSCP – Managed Service Company Provider
- PSC – Professional Service Company i.e., limited company
It’s quite simple, when contracting through your own PSC, the company director, i.e. you in this instance, has complete control of the business. You can seek advice and guidance on what is best for your business regarding tax and payments, however the decision ultimately lies with you, the PSC owner, your accountant has no control over your company’s decision they are just solely an advisor. They take the information you provide and offer direction accordingly.
HM Revenue and Customs introduced the Managed Service Company (MSC) legislation in 2007. This legislation was introduced to prevent many companies “attempts to avoid PAYE Income Tax and Class 1 National Insurance contributions on employment income.” Ultimately companies working as a PSC without paying the same level of tax and NI required.
Some contractors may not even know they are trading as an MSC unless they are working with an MSCP. The definition of an MSCP (manage service company provider) is ‘a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.
How to spot an Accountant working as an MSC Provider. . .
An accountant providing accounting services to your company, doesn’t give them control or influence over your business, nor its finances, and so typically, they would NOT be viewed by HMRC as an MSC Provider.
HOWEVER, this changes if your accountant meets any one of the below five criteria:
- It benefits them financially, usually by taking a percentage of a client’s income for providing services to clients via a limited company.
- They promote, and state that tax investigation insurance products are a requirement – if they are continually stated they need you to have this insurance, ask yourself why do you need it? Ask these questions.
- They have influence on how payments are made – an accountant will provide calculations for YOU to decide whether to implement them. An MSC could take control of that decision for you. I.e., giving them greater control.
- They influence how services are provided – they should not be telling you whether you are doing your job right, how you are doing it, that you need to secure more work. An MSC provider should not have impact on the day to day understanding of your work/sector type.
- They have say over decisions such as which business bank account to use – again an accountant will give a recommendation, the decisions however still lies with you whether to use them. If it is enforced, that is an MSC provider.
If they are in breach of legislation when it comes to paying tax, and if you use them, it’s likely that you’ll be liable for additional tax – even if you weren’t aware the rules were being breached.
These are all things a bona fide accountant will not do! The job of your accountant is to advise you and work in your best interest, not in THEIR best interest.
How do HMRC classify a company as an ‘MSC’?
The Financial Secretary to the 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 four following conditions is what HMRC will look out for when trying to identify an MSC:
- The business consists, either completely or in the main, of providing directly (or indirectly) services of an individual to end clients
- The afore mentioned individual supplying these services receives payments for the work they’ve done that is either the total, or almost equal, to the full payment received by the company
- There is a person going by the term ‘MSC Provider’ involved with the company
- The payments the worker receives are greater than what they would have been if they were treated as employment income (i.e. subject to standard taxation) – cross reference against HMRC site.
What if you have received a letter from HMRC?
If you have received, what is called, a Regulation 80 determination letter, you have 30 days to appeal this with HMRC. If you do not appeal you would be liable for the unpaid tax they are requesting for that financial year.
If you need further advice on this call us to discuss this further.
How is an MSC Provider different to an accountant?
To re-iterate, your accountant should never act for their own gain. Here at Integro Accounting we will only ever ADVISE YOU so that you can run your business as efficiently as possible and put your best interests first. You, the company owner/director will need to have final say and make the final decision under that advisement – this is what you should expect from your accountant.
Equally, your accountant should never ask for access to your bank details – while they will likely need to read your bank statement at times – these are usually provided in a read only format – they should never actively have access to these login details.
How you work is, at the end of the day, down to you. There are a variety of routes you can take. As noted at the start of this article, HMRC are currently investigating a number of accountancy firms they believe to be MSC Providers. Choosing the right accountant is one of the biggest decisions you will make… so be aware of what an MSC looks like and you’ll know what to avoid.
