IR35 & MSC legislation
IR35 first reared its head via an Inland Revenue press release in 1999 entitled: ‘IR35: Countering Avoidance in the Provision of Personal Services”. IR35 became law via Schedule 12 of the Finance Act 2000 – its prime aim was to ensure individuals working via limited companies would be subject to the same taxation laws as an individual performing the same task under standard PAYE conditions.
The IR35 rules were invented primarily to stop freelancers (particularly IT contractors) from drawing income in the form of a small salary and large dividends from their limited companies, where ordinarily they would be paid a standard salary for performing the same role if they were not working via their own limited company.
A person who worked 9-5 on a client site, had little or no direct responsibility and provided no tools of his own to complete a task would most likely be deemed as ‘employed’ and therefore subject to the IR35 rules. However, a contractor who worked from home, performed tasks for multiple clients and used his own equipment to complete the work would more likely be deemed ‘self employed’ under the rules. The Revenue would look at the overall picture to determine a person’s employment status, so the more pointers there are to genuine ‘self employment’ the better
Since the IR35 legislation came on the scene, many IR35 cases have been disputed, and on the whole the Revenue has found it hard to uphold the new laws. The Inland Revenue leaflet - IR56, 'Employed or Self Employed’ has been provided to help people work out if they will be liable to IR35 or not."
The new legislation, part of the Finance Bill which is due to got Royal Assent in April 2007, included new measures to tackle what could be labelled as "tax avoidance schemes". April 2007 saw the Government introduce legislation relating to Managed Service Companies (MSCs). The consequences of this legislation are to treat all payments received by contractors providing their services through such companies as income subject to employed levels of PAYE Income Tax and Class 1 National Insurances.
Managed Service Company Legislation
It also prevented MSC'S claiming travel to and from work and other related expenses. This has spelt the effective end of the MSC and the composite company including the Multi share class Single person company as there is no longer a financial advantage to use it as corporate vehicle to contract through. An MSC is defined: A service provider is "a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals"
MSC is a form of intermediary company through which contractors provide their services to end clients and importantly, is promoted and operated by a MSC scheme provider who provides the structure to contractors. The contractor does not exercise control over the company. If a service company is within the legislation and the company fails to operate employed levels of PAYE, this could result in individuals being held personally liable for the PAYE debts of the company.
Who is not affected by the MSC Legislation?
Individuals working through Umbrella Companies, where such Umbrella Companies ‘employ’ the contractors under a valid contract of employment and deduct the correct PAYE and NI on their behalf, are understood to be outside the MSC legislation.
Typically, individuals working through Personal Service Companies (PSC) are not within the definition of a MSC as long as there is no MSC scheme provider involved. Contractors are moving either into PAYE Umbrella schemes or seeking to set up their own PSC. Agencies prefer contractors using PAYE Umbrella solutions or PSC's set up and serviced through a legitimate professional firm of Qualified / Chartered Accountants (not ex-MSC providers).