The Managed Service Companies legislation and what IT Contractors need to know


This article was provided by top Accountancy and Umbrella Company 1st Option.

Why does the Managed Service Companies legislation matter?

Freelance consultants should always undertake due diligence whenever they decide to trade using the services of either an accountant or a structured solution.

This is to ensure that not only will they be able to expect an efficient and prompt service but, more importantly, so that they have some understanding of nature of the solution for which they are paying.

The continued existence and proliferation of non-compliant, poorly structured and/or offshore solutions, means that thousands of freelance professionals continue to trade unwittingly, in dangerous territory.

The threat of contractors receiving back-tax demands, not to mention other penalties such as fines or interest, remains a very real one

Background to the Managed Service companies legislation

Schemes promising attractive net returns for freelancers took off around 2001/2 with many ‘providers’ actively offering the use of cleverly marketed structures.

The attraction came from the high net returns that were possible because of the way that contractors were remunerated (usually via dividend payments).

Government felt that such schemes were an abuse of the tax system and new legislation, introduced in Finance Act 2007, killed off these mass marketed solutions.

However, the legislation was drafted so that it potentially caught many firms who were previously well outside of the ‘˜managed‘ arena.

Not only that, but the legislation introduced Debt Transfer provisions.

These provisions created business risk to solution providers.

Recruitment organisations were also detrimentally affected as they could now potentially pick up significant additional tax liabilities if the accountants or service providers fell foul of the new rules.

One consequence of this new provision was that recruiters immediately shied away from offering any guidance to contractors since encouraging the use of a non compliant scheme was one way that the tax debt could be transferred.

Contractors were, in many cases, left ‘groping around in the dark’.

Third party reviews

Up to now there was no ‘litmus test’ to determine whether the services of an accountant or other structure might be a Managed Service Company Provider.

Therefore it has been impossible to tell whether the limited company structures being used by contractors were in fact ‘˜managed service companies‘.

There are various organisations who review structures and offer an opinion on the level of compliance available – these were useful additions to the industry landscape.

However they still remain nothing more than opinions.

Now there is ITEPA 2003 Chapter 9 (Managed Service Companies legislation) created for HMRC‘s compliance unit.

Notes about 1st Option and contact details

1st Option has become the first accountant to have its own structure fully reviewed against this.

The review was completely at the behest of 1st Option and this radical course of action was undertaken with certain key objectives in mind.

Among them, to protect the interests of UK freelance professionals; to protect its own business operations; to promote good practice; and to clarify existing legislation creating a clear separation between the compliant suppliers and rogue elements.

1st Option believes that HMRC remain committed to tackling what they see as abuse of the tax system and use of incorporated structures, purely to secure a tax advantage.

The process that it has undertaken has meant that it is ideally placed to share its recent experience and knowledge with UK freelancers and help protect their business and financial interests.

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