What is a Managed Service company?

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Andy Vessey
09 Apr 2021 @ 08:04 am
in category: IR35 Hub

A number of market commentators have raised questions about the potential risk to recruiters of being caught in the crosshairs of the MSC legislation where they are “touting” IR35 insurance. We thought it might be useful to clarify what an MSC is (and how it differs from an MSCP), what exactly the legislation means for recruiters, and how it applies to IR35 insurance products., As always, if you have any concerns, you should seek professional tax and legal advice. 

The MSC legislation was introduced on 6th April 2007 to counter “tax avoidance” by the use of composite companies. It was deliberately widely drafted and therefore causes understandable concern.   

What is an MSC?  

Put simply, a Managed Service Company (MSC), is a Personal Service Company (PSC) (although can also be a partnership), where there is a present Managed Service Company Provider (MSCP) who is involved with the PSC.  An MSCP, in turn, is defined as “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.”  

“Promoting” and “facilitating” here take their generally understood meanings and include on one hand marketing, i.e. encouraging and initiating the use of PSCs, and on the other hand helping, i.e. making easier and enabling the use of PSCs.  For the MSC legislation to apply, however, two conditions need to be satisfied: 

1.      That there is an MSCP 

2.      That the MSCP is involved with its limited company client. 

Involvement is the key word and is determined by reference to the fulfilment of any one of five tests. Of these, the fifth test is the one that is causing some comment, namely the “giving or promoting an undertaking to make good any tax loss.”  

MSC and Recruitment Agencies  

Importantly, though, the legislation specifically exempts recruitment agencies from being an MSCP provided that all they are doing is carrying on their core business of placing work seekers (including those operating through PSCs) with end clients. That exemption is lost, however, if the agency, amongst other things, offers or promotes tax loss insurance. However, even here it is important to note that that does not automatically mean that the agency is caught by the MSC legislation.  It simply puts the agency in a position where it cannot just rely on the exemption and therefore must, if challenged, be able to demonstrate that it is not an MSCP.  

Many end-clients and recruiters are now requiring genuine contractors to indemnify them from the risk of HMRC challenging an outside IR35 status determination under the off-payroll rules, much as they already require contractors to hold PI and PL insurance.  In response, many end-clients and recruitment agencies have changed their terms and conditions to make holding suitable insurances a prerequisite to PSCs beginning work on a contract.  The contractor is therefore left with a choice of either accepting these requirements or seeking work elsewhere. 

It is therefore difficult to argue that, in pointing out this contractual requirement, participating in a robust status determination assessment, such as the Kingsbridge Tool, and if appropriate, either introducing a suitable insurer or allowing a contractor to use an insurance provider of their choosing, that a recruitment agency is likely to fall foul of the MSC legislation.   

HMRC and the MSC legislation 

To validate this perspective, I approached Patrick Ford, a Tax Partner at law firm Squire Patton Boggs for his views.  He commented that:     

“The difficulty with tax anti-avoidance legislation generally is that it tends to be drafted very widely, with HMRC then using its discretion to apply it in the manner in which it was intended. It is therefore important to take into account the intention of the legislation and HMRC’s approach to it. The reference to making good any tax loss is aimed at where a company/contractor is being encouraged to avoid tax on the basis that it has cover for the risk involved.” 

“HMRC understands that the test of whether an individual is working like an employee is difficult with some grey areas, as evidenced by the “unable to determine” result in the HMRC CEST tool. My experience with HMRC is that they do not see it as tax avoidance where a taxpayer is insuring itself against genuine legal uncertainty, as opposed to where it is insuring against a high-risk tax avoidance strategy. Where the insurer requires evidence of a reasonable basis for making the outside IR35 determination before providing the insurance, this involves insuring against genuine legal uncertainty.” 

To that end, it is noteworthy that in the 14 years of the existence of the MSC legislation, there has only been one case that has reached the courts and that was an absolutely clear-cut situation that did not involve tax loss insurance. That is not to say there have not been any other MSC investigations over the years, but there do not appear to have been many. Furthermore, certain well established and respected IR35 insurance providers or their partners have, as far as Kingsbridge are aware, never been challenged by HMRC with this legislation in all of its 14 years of existence. 

Insurance companies are not MSCP’s 

For those recruitment agencies working with Kingsbridge, it should also be noted that Kingsbridge’s core business is an insurance brokerage and IR35 consultancy. We do not tell or advise contractors on how to set up their businesses nor which legal structure they should adopt, nor do we act in concert with any other party that could make us an associate of an MSCP. Therefore, quite simply, IR35 insurance and status determination providers like Kingsbridge are not categorised as an MSCP. 

Indeed, it is worth noting that HMRC itself in its guidance ESM3515 gives some examples of companies that are not MSCPs and one of those is insurance companies providing services to companies generally. Further in July 2007, HMRC produced some guidance for recruiters in the form of Q&As which made it clear that it was perfectly permissible for them to provide factual answers to workers’ questions without fear of being tarred with the MSC brush.  

It is important to get MSC right and recruitment agencies must be careful how they are marketing this product.  However, in requiring PSCs to hold IR35 insurance to protect against the risk of HMRC challenging a determination and then helping those PSCs identify a suitable insurer if required, be that Kingsbridge or any other insurance provider, recruitment agencies are doing no more than helping their limited company contractors and clients be compliant and that is surely to be encouraged. 


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