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Employer FAQ – Employment Status
Wednesday, June 17th, 2009
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What are the tax and NICs requirements for workers in “Managed Service Companies”?
Like Personal Service Companies (PSCs), Managed Service Companies (MSCs) are also intermediary companies through which the services of a worker are provided to an end client. In structural terms, they may be “composite companies”, where up to perhaps 20 workers become shareholders in the same limited company, or “managed personal service companies”, where there is just one worker per company, as with PSCs. The key difference from PSCs is that the worker in an MSC is usually not in business on his own account and does not exercise control over the business. This control lies with a separate business, known as the “managed service scheme provider”, which sets up and administers the MSC on behalf of the worker.
Prior to April 2007, MSCs fell, in principle, within the legislation for PSCs (IR35). However, due to widespread non-compliance by MSCs and their failure to tax all travel, accommodation and subsistence expenses, the government removed MSCs from the scope of the IR35 legislation. MSCs now have had to treat payments made to workers, including expenses payments for commuting journeys and related accommodation and subsistence, as employment income and deduct PAYE tax and Class 1 NICs as if they were employees of the MSC. The MSC is the secondary contributor for NICs purposes.
An MSC must be distinguished from
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A limited company or partnership is a Managed Service Company (MSC) if its business consists wholly or mainly of providing the services of workers, directly or indirectly, to other persons and
- the greater part of the payment for the provision of the services of a worker is made, directly or indirectly, to the worker or an associate of the worker (e.g. the worker’s spouse), and
- the provider of the scheme under which the services are provided, or an associate of the scheme provider, (and not the workers), exercises control over the finances or general management of the company or partnership.
An MSC is treated as having made a “deemed employment payment” to a worker if
- the services of the worker are provided by an MSC (or some other person) in this way, and
- the worker, or associate of the worker, receives a “payment or benefit” which, however it is described, may reasonably be taken to be in return for the services provided, and
- the payment or benefit is not paid by the MSC as wages or salary that have already been subjected to PAYE tax and NICs.
To ensure compliance, all employers, including service companies, are required to answer the following Question 6 in the Part 3 – Checklist section of the P35 Employer Annual Return:
- Are you a Service Company?
- If ‘Yes’, have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?
An MSC must answer “Yes” to the first question. The answer to the second question must also be “Yes” if all payments and benefits to the worker have been taxed at the time they were provided under PAYE.
Calculating the deemed payment
A “payment or benefit” means anything that, if it were received by an employee for performing the duties of the employment, would be earnings from the employment. If the payment or benefits include unidentifiable sums that relate to matters other than the services provided by the worker, the payment may be apportioned on a fair and reasonable basis.
The “deemed employment payment” is treated as having been made to the worker by the MSC, whether or not the MSC actually made it, and is subject to PAYE tax and NICs. The liability arises at the time the “deemed employment payment” is made to the worker.
If the worker receives a non-cash benefit, it is treated as earnings and given the value of its cash equivalent, using the standard P11D reporting rules. There is no P11D reporting arrangement; non-cash benefits are taxed in full at the time they are provided.
The amount of the “deemed employment payment” is calculated in three steps:
Step 1: Calculate the value of the payment and the cash equivalent of any non-cash benefits.
Step 2: Deduct from the value at Step 1 the amount of any expenses that the worker has met which, if the worker had been employed by the client (the person to whom the services were supplied), would have been allowable. Because the worker is not treated for this purpose as an employee of the MSC, any travel to the place where the services are provided is a commuting journey, not a journey to the worker’s temporary place of work. As a result, no travel, accommodation or subsistence costs in connection with the commuting journeys can be taken into consideration. If, after deducting the permitted expenses, the result at this step is nil or negative, there is no “deemed employment payment”.
Step 3: The result at stage 2 is treated as including the amount of employer NICs due on the payment. It is therefore reduced by that amount to give the amount on which there is a liability to PAYE tax and employee NICs. For example, if the Step 2 amount is £1,548, the Step 3 calculation gives £1,420 (i.e. the employer contribution on £1,000 – after deducting the first £420 – is £128 at the 2009/10 rate of 12.8%).
The expenses deducted at Step 2 can include any mileage allowance relief, to which the worker would have been entitled as an employee of the client, in respect of a car that is provided by the MSC or, in the case of a partnership, by the worker for the purposes of the business of the partnership.
If the MSC is a partnership, any expenses incurred by the worker on behalf of the partnership may also be deducted at Step 2.
The MSC is only treated as the employer, with the responsibility of handling the PAYE tax and NICs liabilities, where those liabilities would have fallen on the client if the worker had been an employee of the client. If, in such a situation, the client would not have had any tax and NICs liabilities, i.e. because the worker is resident, ordinarily resident and domiciled outside of the UK, or the client is resident or ordinarily resident outside of the UK, or the services are provided outside of the UK, neither does the MSC have any tax and NICs liabilities on the “deemed employment payment”.
Transferring PAYE and NICs debts
To prevent the problem of MSCs closing down order to avoid the payment of tax and NICs assessments and moving the workers into a new MSC, the MSC legislation allows the debt to be collected from a third party. Such third parties are defined as
- a director or other office-holder, or an associate, of the MSC,
- the scheme provider,
- a person who (directly or indirectly) has encouraged, facilitated or otherwise been involved in the provision by the MSC of the services of the individual, and
- a director or other office-holder, or an associate, of a person within point (b) or (c).
The wording at point (c) brings into the scope of the legislation:
- an employment agency that advises workers approaching it for work to incorporate and tells them to use a particular scheme provider, but not an agency that simply provides a worker to an end client and that did not know and could reasonably not be expected to know the worker was operating through an MSC.
- an end client who told workers that they had no choice but to incorporate through an MSC or offered higher rates of pay to encourage workers to move to an MSC, but not an end client who used workers from an employment agency without knowing whether the workers were operating through MSCs.
- workers in an MSC who are aware that they are providing their services through the MSC.
However, professional advisers, such as accountants and lawyers, are excluded from the scope of the legislation.
Only if the debt cannot be recovered from the MSC will HMRC move to issue a Transfer Notice against a third party – initially those listed at point (a) or (b) above. Only if it is either impossible or impracticable to recover from those parties will the debt be transferred to those at point (c). The legislation sets time limits for transfers and provides an appeal procedure.
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