Chancellor acts to block MSCs' efforts to avoid taxation

Chancellor Gordon Brown tightened the rope around composite and managed service companies’ (MSCs) necks by making changes to draft legislation that will wring an extra £1bn out of the sector over three years.

The changes were in response to a flurry of conversions of MSCs into personal service companies (PSCs).

The manoeuvring was supposed to allow MSC scheme providers to avoid being defined as “exercising control over the finances and management” of workers in composite companies. By using PSCs, they hoped they would be one step removed from the process and avoid being drawn into the
legislation.

But the Treasury took note of a consultation on MSCs, as well as anecdotal evidence that suggested conversions to PSCs were causing major headaches at Companies House, HM Revenue & Customs and at banks around the country.

It has now widened the definition of an MSC provider, which tax expert Grant Thornton said will catch many of the newly-created PSCs when the legislation comes into force next week.

Anil Patel, senior manager in Grant Thornton’s employer solutions group, commented: “This could mean that these providers have very minimal space to manoeuvre in. Are businesses going to fold, or are they going have to re-invent themselves?”