PSCs were designed to ‘disguise employment’ by placing an intermediary, usually a company, between the payer and worker. This minimised the amount of tax and NIC due by paying that worker predominantly with dividends.

Managed Service Companies (MSCs) attempt to avoid the IR35 rules. The types of MSCs vary but are often referred to as ‘composite companies’ or ‘managed PSCs’. HMRC have encountered increasing difficulty in applying the IR35 rules to MSCs because of the large number of workers involved and the labour-intensive nature of the work. Even when the IR35 rules have been successfully applied, an MSC can often escape payment of outstanding tax and NIC as they have no assets and can be wound up.

The government announced in the Pre-Budget Report that they will remove MSCs from the IR35 rules and introduce new rules from April 2007. The intentions of the new rules are to:

• ensure that those working in MSCs pay tax and NIC at the same level as other employees

• alter the travel and subsistence rules for workers of MSCs to ensure they are consistent with those for other employees
• allow the recovery of outstanding tax and NIC from ‘appropriate third parties’.

Internet link: Pre-Budget Report