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Usually, people work as either a self-employed individual or an employee for a business. Nevertheless, there are some other ways of working that have become quite prevalent in recent years. Here, we take a look at these alternatives and how their use could lead to a tax investigation.
Personal Service Companies
Personal Service Companies represent another way of operating. That means that rather than directly supplying the service as an individual who is self-employed, instead, the service will be supplied by the company that employs the individual. Typically there is only a single employee at the company who is its director too.
Managed Service Companies
Managed Service Companies are another possibility. An MSC is a kind of limited company in the UK that is used by self-employed individuals and contracts where the workers are both shareholders and directors. These companies act as intermediaries between an end user business and an individual and so are similar to Personal Service Companies. There is a difference, however. With a Managed Service Company the person who provides the service has no control over it, even though they are a minority shareholder.
MSCs were first introduced back in 2000 at the time that the IR35 legislation was brought into effect by HMRC. While MSCs are not recognised in law as a business structure, in practice, the term is frequently used when describing limited companies with workers who are appointed as directors and/or shareholders of the organisation.
In order to work as part of an MSC, the company has to pass the IR35 test to make sure that you are paying the right amount of national insurance and income tax to HMRC. A new law was brought about in 2007 for MSCs to comply with taxation legislation since some were managing to avoid paying taxes via the company.
If you are a contractor who uses an MSC, you still must pay the right amount of national insurance and income tax just as you would as an employee. Should HMRC find that you are using a Managed Service Company in order to avoid paying tax, you will be liable not only for all backdated payments but a fine too.
PSCs And MSCs – The Difference
Both PSCs and MSCs are kinds of limited companies. They were both introduced in 2000 because of the introduction of IR35 legislation which aimed to reduce incidences of tax evasion.
While both types of company are similar in terms of structure, personal service companies are defined as limited companies operated and owned by just one person. Managed service companies, on the other hand, can have multiple shareholders, directors, and owners.
PSCs usually have an owner who is also the only shareholder and director of the organisation. MSCs, meanwhile, have many workers who are shareholders and directors. Essentially, MSCs control the business instead of the contractor. Nevertheless, in both types of business structure, the directors or shareholders are the employees who carry out the work.
IR35 Legislation
Legislation was introduced in April 2000 that changed how tax was treated in arrangements where, if services have been directly provided by the individual and not through the company they would have been deemed to be an employee.
Reviews of employment status are frequently carried out by HMRC to determine whether an individual as actually self-employed or is treated more correctly as an employee. In cases where Personal Service Companies are acting as intermediaries, HMRC is unable to determine that the company is another business’s employee. But if HMRC determines that the person in question would otherwise have been treated as an employee if it was not for the company’s intervention, IR35 legislation is applicable. In practice, that means rather than using the PAYE system to handle the actual benefits and salary that the service company pays to the employee, instead, a deemed salary payment must have PAYE applied to it, worked out according to the prescribed formula.
Whether the end client is a public sector client, or a large or medium sized private sector business with balance sheet assets exceeding £5.1 million, an annual turnover amounting to at least £10.2 million, £5.1 million and/or over 50 employees, the IR35 legislation means that the end client has to operate PAYE on all payments that they make.
The person who provides the service has the responsibility of determining whether IR35 applies or not, although it is possible for the provider of the service to challenge their decision. If they make the wrong decision and it is decided by HMRC that in fact IR35 should be applicable, then going forward, HMRC will not only seek to rectify that position, but also attempt to recovery further National Insurance Contributions and tax that becomes due because of this change for earlier years as well as penalties and interest.
Using A Tax Investigation Specialist To Help With IR35 Issues
It is deemed by HMRC that using a Personal Service Company or Managed Service Company is a way of avoiding tax. While it may be legal, they would prefer to stop the practice whenever possible. With this in mind, HMRC has introduced legislation that aims to discourage these ways to carry out business. If HMRC has a suspicion that you operate through a Managed Service Company or Personal Service Company, they may decide to open an investigation into your tax affairs. It may be either a Company or Personal tax investigation or even both depending on your circumstances. If this happens to you, you need to use the services of skilled and experienced tax investigation specialists who can help you with your dealings with HMRC during the investigation process.
As experts in the field, tax investigation specialists can help in all cases where managed service companies, personal service companies of IR35 legislation is an issue. By consulting with a professional team, you can ensure that you experience the best possible outcome from the investigation and avoid any undue penalties that could come your way.
