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Managed Service Company Legislation & Insurance

23rd February 2024

By Ben Leeson – Director at Caunce O’Hara Insurance Brokers Limited, trusted advisor and specialist provider of insurance products to umbrella companies across the UK.

Managed Service Company (MSC) legislation was introduced in the 2007 Budget to address concerns related to tax avoidance and the perceived misuse of intermediary companies in the provision of workers’ services. It is intended to prevent individuals forming companies (such as personal service companies) and receiving income in a way that minimised their tax and National Insurance contributions.

One of the most common examples of this was by distributing income as dividends or loans, which were subject to lower tax rates compared to regular employment income.

Many of you will be familiar with the legislation, and likely attended the recent FCSA webinar hosted by BDO UK LLP.

As a recap, for the legislation to apply, it requires three things:

  1. A Company – typically a Personal Service Company
  2. A Provider – known as a Managed Service Company Provider
  3. Involvement of the Provider in the Company

For the purposes of this legislation, a Company is one in which the following criteria are met:

  1. Provision of services: the company provides services to clients using individuals who work under contracts for services
  2. Income distribution: all, or the majority, of the income of the company is paid out to individuals in the form of dividends, loans, or any other means, rather than through salary and subject to PAYE (ie. outside IR35).

It is the definition of Provider which has prompted calls to our offices, even more so following events in March 2022 when HMRC issued Regulation 80 notice letters to contractor companies who utilised the services of at least two specialist accountancy companies for the 2017/18 tax year.

A Company will be a managed service company if there is also a Provider, an entity which carries out the business of promoting or facilitating the use of companies to provide the services of individuals and is involved with the company.

Involved? We do have clarity on what involved means in this context. A firm could be a provider if any one of the following apply:

  1. That of benefiting financially on an ongoing basis from the provision of the services of the individual who provides those services through an MSC
  2. influencing or controlling the provision of the services of the worker
  3. influencing or controlling the way in which payments to the worker or an associate are made
  4. influencing or controlling the company’s finances or any of its activities
  5. that of giving or promoting an undertaking to make good any tax loss

The calls made to our offices raised the same concerns- that the HMRC is attempting to test the legislation against specialist accountancy and umbrella businesses; that they should be considered Managed Service Company Providers. Those concerns were amplified on account of the legislative ability to transfer the tax liability from the Company, to the Provider, and even to the Directors of the deemed Provider, personally.

COHIBL designed and provided the first umbrella insurance product back in 1999 and continue to insure most umbrella companies in the UK. We understand the sector and its needs, and we know that specialist accountancy firms, payroll providers and umbrella companies are not the organisations that the legislation is designed to target.

The question remains, what insurance cover is available in the event the HMRC turns their attention to one of our insureds? We certainly can’t make good any tax loss, not least because there is no viable insurance product available for this liability. Insurers will take the view that there has been no ‘loss’ incurred, as the tax liability has always been due.

Further, point 5 above would suggest that in providing an insurance for tax liability, we may inadvertently strengthen an argument that an insured is ‘involved’ – that of giving or promoting an undertaking to make good a tax loss.

There is some insurance cover available within a Management Liability policy, referred to as some providers as a Directors and Officers insurance policy.

Although a Management Liability policy is the most relevant type of insurance, it has certainly not been designed with MSC legislation in mind. It is likely that insurance underwriters designed their management liability product in consideration of the more common and wider reaching risks facing business than a specific piece of legislation, in a specific sector, such as this.

Management liability insurance is designed to safeguard the personal assets of directors, officers, and the company itself, providing financial protection in the event of legal disputes or regulatory scrutiny.

Cover is usually broken down into three core sections, each with its own limit of indemnity, terms and conditions:

  1. Management Liability (claims against individual directors and officers)
  2. Corporate Legal Liability (claims against the entity/company)
  3. Employment Practices Liability (claims relating to employment wrongful acts, which we will discount for now as not relevant to MSC legislation)

Like all regulatory areas, there are debates about when claims will be pursued against the company vs the directors, and that is difficult to predict. In the UK, we’d expect regulatory or statutory bodies to pursue actions against directors personally only in cases of extreme negligence, or deliberate misconduct where there is clear evidence of personal culpability or egregious misconduct.

It could be considered that passing a tax liability on to an individual director is an exceptional and punitive step, and therefore not something we would expect to happen with any of our clients, respectable businesses which not only operate within the law but go further- accreditation and membership to the FCSA being a good example of this.

The legislation is the legislation, and it contains debt transfer provisions, and therefore the risk for directors, however remote, exists.

Claims against individual Directors / Officers will fall under Management Liability and claims against the company would fall under the Corporate Liability section. It is the Corporate Liability section of cover that we would expect to be most pertinent. The HMRC are much more likely to bring an action against a company, as companies have greater financial resources and are seen as more accountable entities for tax liabilities and compliance.

A tax liability will not be covered by either section of an insurance policy. Dependent on the cover offered by your insurer, we would expect an insurance policy to offer some cover for defence and investigation costs incurred in responding to this claim scenario. This may offer some comfort to directors considering the significant expenses associated with mounting a robust defence when the balance sheet or personal assets are at stake.

In respect of claims brought against the entity, there are likely to be other sections of cover that may pick up costs ranging from mitigation of losses through to crisis containment and public relations costs.

Not all policies are equal. Cover varies from insurer to insurer with some choosing to apply sub-limits to manage their exposure, or specifically exclude certain claims altogether. If you are concerned about this piece of legislation, or another area of management risk altogether, it’s important to speak to us so we can source the most appropriate insurance product.

Of fundamental importance in the event of claim, is proactive engagement with us. We appreciate there will be a desire to quickly begin your defence, but early involvement allows us to ensure you are compliant with the notification requirements contained within your insurance policy. Late notification could lead to coverage disputes, claims that the insurer’s ability to defend you has been prejudiced, or even the denial of an otherwise covered claim. Involving us early will allow us to manage the notification process whilst providing a thorough assessment of policy coverage considering the claim presented.

In addition to recommending the right insurance product for you and assisting you in the event of a claim, COHIBL have access to specialist legal and tax specialists who understand the legislation and can provide consultancy through comprehensive reviews of your business practices, contractual agreements and marketing materials, minimising the risk to you and your business.

If you would like to find out more about how COHIBL can assist you

Click here to email a member of our team