The concern expressed by many attendees to our Budget seminar was that many of the new solutions which are based around the original draft control definition would now be deemed as MSCs. This potentially puts thousands of contractors who have been recently moved into a PSC structure by their MSC providers in a position of having to seek another solution.

Under section 4.7 of the "summary of consultation responses" the government has revealed another "nuclear" shift of approach.
(If by concentrating on the role and the business of the MSC they are able to determine that one of the PSCs operated by the scheme provider fails the definition, then that scheme providers business will be classed as MSC).

It appears HMRC do not want to spend thousands of man hours investigating each individual company and instead allow a blanket classification catching all companies provided by the provider on a single fail.

Perhaps this is also an attempt to achieve Gordon Browns' objective of culling tens of thousands of Civil Servants.

Further sub-clauses have also been added to the legislation to prevent MSC providers circumventing the legislation by splitting the constituent elements of their business between various parties (all parties will be considered associates under the legislation).

There are 5 criteria which define an MSC:
A recruitment agency will and can fall with in (a) and (b) but will not be an MSC providing it does not also meet (c) to (e).

An agency may:
1. Benefit Financially
2. Influence or control the services provided by the worker

But may NOT also:
3. Influence or control the way in which payments are made to the worker
4. Influence or control the company’s finances or any of its activities or
5. Gives or promotes an undertaking to make good any tax loss

In the Pre Budget report published on 6^th December 2006 Treasury voiced concerns over agencies who have established joint ventures or set up their own MSCs. In the consultation summary, they refer to other parties that are "financially involved or who financially benefit". Agencies must beware of falling into the latter classification.

"Transfer of Debt" provisions will not apply to agencies and end clients for any debts incurred before 6th January 2008.

The delay to the implementation of debt transfers to agencies and end clients is in direct response to representations made during the consultation. Treasury accept that agencies need more time to review compliant options in order to provide guidance to their contractors on how to avoid non-compliant solutions.

Despite the delay for agencies and end clients, Treasury also confirmed its concerns that currently the main source of information for contractors is the scheme providers themselves; however there will be NO delay for debt applying to contractors or the scheme providers (and associates). These will commence from 6th April 2007 for Income tax debts, which can be transferred after Royal Assent which is expected by July. NIC debts are expected to follow approximately one month later.

Responding to concerns over the classification of A.T.P.s Treasury have amended definition 61B (1)(d) to represent an A.T.P. as:

"A person who (directly or indirectly) has encouraged, facilitated or otherwise been actively involved in the provision of the MSC."

This wording is less all-encompassing and does support the statement in section 4.17 of the summary document that Treasury "never intended that the end client should be brought within the scope."

Whilst most agencies who attended our Budget seminar appeared to welcome the revised wording and the level of protection it offers end clients, some concern still remains over how the courts will define "actively involved" in relation to the agency's activities.

Treasury have also ended the speculation over the classification of PAYE umbrella companies. In section 3.33 of the summary document the government has confirmed its position that genuine PAYE umbrella companies are not within the scope of the legislation.

This is not to say that compliance checks are not required as many agencies voiced concerns over off shore payment solutions operating under the guise of "umbrella".

Agencies and contractors should ensure that any umbrella company they deal with follows the minimum requirements of:

1. Being a registered UK company with no onward movement of funds
2. Engaging the worker directly as an employee
3. Operating a full PAYE payroll in respect to all funds paid to the worker
4. Only permit allowable expenses and dispensation expenses (supported by HMRC confirmation) via the payroll
5. NOT providing any form of employee loans, shareholding or share options, etc

In section 4.16 of the summary document, Treasury state that the legislation will specifically exclude accountants or lawyers giving advice in a professional capacity.

The Tackling Managed Service Companies document, published in the December 2006 Pre Budget Report, states "The government encourages fair competition where providers of professional services offer support service to companies allowing them to achieve economies of scale – providing they do so in a way that these companies comply with the law and pay the appropriate levels of Tax and NICs".

This goes on in the draft "Transfer of Debt" legislation where section 688A(3) states that a person does not fall within the legislation merely by providing "advice in a professional capacity".

The overriding theme from the latest draft of the MSC legislation is a positive one for agencies and their clients. Treasury has conceded several of the points raised during the consultation and have provided a nine month extension before any debt can be applied to agencies of clients.

However we should also not ignore the speed with which Treasury has reacted to commercial developments by the MSC providers and the determination they have demonstrated in preventing any providers circumventing the initial draft.

Treasury say they have delayed the debt transfer provisions to allow agencies time to better understand and guide their contractors towards compliant solutions.

• Understand the issues raised in the last version.
• Choose a regulated firm.
• Beware of ex-MSCs turned "professional accountancy service providers"
• Choose an Approved Supplier List (ASL) rather than a Preferred Supplier List (PSL).

This suggests that treasury may look favourably upon the implementation of "Approved Supplier Lists" by agencies in order to allow contractors to make an informed decision.

In light of the revision to the legislation it appears that agencies are facing the following options:

1. To do nothing – carries high commercial risk.
2. Compliance checks are your defence - Carries a high administrative burden.
3. Approved Supplier List rather than a Preferred Supplier List – will limit risk and administration levels.
4. Only allow PAYE Umbrellas – Safe but restrictive.

If an agency chooses to elect an "Approved Supplier List" they should also distinguish between the characteristics of professional provider of accountancy services who operates on a fixed annual fee as opposed to an MSC provider (see adjacent figure) who will typically charge in relation to each timesheet or a percentage of the invoices raised.

Any compliance questionnaires you issue should be revised to include questions incorporating the changes to the draft legislation.
A few suggestions:

• Do you give, or promote in any way, any form of IR35 insurance?
• Do your charges differ, depending on the business bank provider?
• Are your fees based on (pick one of the following):
• A fixed annual fee?
• A fee per timesheet per week/month invoiced?
• A percentage of invoice value?
• How many have had IR35 investigations?
  What was the outcome?
• Can you confirm that none of the funds are paid off shore prior to the contractor receiving their funds (off shore includes but is not limited to the Isle of Man and the Channel Islands)?
• Do you collect the tax, VAT or NIC due from the PSC for payment to the relevant authorities? (If Yes, then influence over the company finances)
• Have you offered MSCs in the past?
• If so have any of these MSCs had IR35 investigations?
• If yes , how many and what was the outcome?

3Sixty will be hosting a series of free nationwide seminars for contractors who wish to better understand the impact of the latest draft of the MSC legislation. If you would like to attend or to inform your contractors, the seminar details are as follows: