Tax crackdown on MSCs boosts company registrations

UK company registrations have soared due to impending tighter regulation of
the tax rules surrounding managed service companies.

Workers operating within managed service companies (MSCs), who can benefit
from lower tax bills, have moved to incorporate into their own business as a
response to chancellor Gordon Brown’s promise to crackdown on tax avoidance from
last year’s pre-Budget report in

An extra 25,000 company registrations were filed between December 2006 and
the first three weeks of February compared with a year earlier, according to
Companies House figures.

‘The chancellor’s attack on MSCs has been given teeth by enabling the
devolution of tax and NI liability onto the promoters of such companies, so it
is not surprising to see a lemming-like exodus from those structures,’ said
, a consultant to tax advisory firm Professional Tax

He warned that the new incorporations were moving into personal service
companies (PSCs) and could still fall foul of the taxman. PSCs differ from MSCs
in that the individuals become directors of the companies, which has been
construed as making the PSCs tax compliant.

‘Professionals advising their clients to set up singleton companies should
remember that the underlying contracts that the company has must be incapable of
being construed as contracts of service – otherwise they will find themselves
leaping out of the MSC frying pan into the IR35 fire.’

Accountancy software house
Iris has
also seen a leap in the takeup of its company formation software in the last
three months, claiming that advisers are telling clients to ditch MSCs and

The company said the software had outsold all its other products during the
period since the pre-Budget report.

Further reading:

Taxman hesitates over IR35 quandary

PBR 06: Brown to bring in billions on tax avoidance

Composites face £1bn tax doomsday

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