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As announced at the time of the Pre-Budget Report, workers supplied by Managed Service Companies are to be taken out of the IR35 legislation that applies to Intermediaries and come under new PAYE and NICs legislation from 6 April 2007. The following notes summarise the new legislation, as it currently stands. There may be changes made as a result of the current consultation exercise.
Nine new sections, numbered 61A to 61I, are added to the Income Tax (Earnings and Pensions Act) 2003 and are headed "Managed Service Companies". The following definition of a Managed Service Company (MSC) encompasses "composite companies" which have a number of worker-shareholders, and "managed personal service companies", which have only one worker for each company structure.
As defined, 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.
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 (although how that is determined is not yet clear). 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 Stage 3 calculation gives £;1,420 (i.e. the employer contribution on £;1,000 - after deducting the first £;420 - is £;128 at the 2006/07 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".
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