Finance Bill

House of Commons

Session 2006 - 07
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Finance Bill

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
93

61C
Section 61B: supplementary
(1)
The Treasury may by order provide that persons of a prescribed
description do not fall within section 61B(1)(d).
(2)
An order under subsection (1) may be made so as to have effect in
relation to the whole of the tax year in which it is made.
5
(3)
In section 61B and this section, “company” means a body corporate
or partnership.
(4)
References in section 61B to an associate of a person (“P”) include a
person who, for the purpose of securing that the individual’s
services are provided by a company, acts in concert with P (or with
10
P and other persons).
(5)
In section 61B(2)(e), “undertaking to make good any tax loss” means
an undertaking (in any terms) to make good (in whole or in part, and
by any means) any cost to the individual or an associate of the
individual resulting from a relevant provision, or a particular kind of
15
relevant provision, applying in relation to payments made to the
individual or associate.
(6)
In subsection (5) “relevant provision” means—
(a)
a provision of the Tax Acts,
(b)
an enactment relating to national insurance, or
20
(c)
a provision of subordinate legislation made under any such
provision or enactment.
The deemed employment payment
61D
Worker treated as receiving earnings from employment
(1)
This section applies if—
25
(a)
the services of an individual (“the worker”) are provided
(directly or indirectly) by a managed service company (“the
MSC”),
(b)
the worker, or an associate of the worker, receives (from any
person) a payment or benefit which can reasonably be taken
30
to be in respect of the services, and
(c)
the payment or benefit is not earnings (within Chapter 1 of
Part 3) received by the worker directly from the MSC.
(2)
The MSC is treated as making to the worker, and the worker is
treated as receiving, a payment which is to be treated as earnings
35
from an employment (“the deemed employment payment”).
(3)
The deemed employment payment is treated as made at the time the
payment or benefit mentioned in subsection (1)(b) is received.
(4)
In this Chapter—
“the worker” has the meaning given by subsection (1),
40
“the relevant services” means the services mentioned in that
subsection, and
“the client” means the person to whom the relevant services are
provided.
(5)
Section 61F supplements this section.
45

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
94

61E
Calculation of deemed employment payment
(1)
The amount of the deemed employment payment is the amount
resulting from the following steps—

Step 1

Find (applying section 61F) the amount of the payment or benefit
5
mentioned in section 61D(1)(b).

Step 2

Deduct (applying Chapters 1 to 5 of Part 5) the amount of any
expenses met by the worker that would have been deductible from
the taxable earnings from the employment if—
10
(a)
the worker had been employed by the client to provide the
relevant services, and
(b)
the expenses had been met by the worker out of those
earnings.

If the result at this point is nil or a negative amount, there is no
15
deemed employment payment.

Step 3

Assume that the result of step 2 represents an amount together with
employer’s national insurance contributions on it, and deduct what
(on that assumption) would be the amount of those contributions.
20

The result is the deemed employment payment.
(2)
In step 2 of subsection (1), the reference to expenses met by the
worker includes, where the MSC is a partnership and the worker is a
member of the partnership, expenses met by the worker for and on
behalf of the partnership.
25
(3)
In step 2 of subsection (1), the expenses deductible include the
amount of any mileage allowance relief which the worker would
have been entitled to in respect of the use of a vehicle falling within
subsection (4) if—
(a)
the worker had been employed by the client to provide the
30
relevant services, and
(b)
the vehicle had not been a company vehicle (within the
meaning of Chapter 2 of Part 4).
(4)
A vehicle falls within this subsection if—
(a)
it is provided by the MSC for the worker, or
35
(b)
where the MSC is a partnership and the worker is a member
of the partnership, it is provided by the worker for the
purposes of the business of the partnership.
(5)
For the purposes of subsection (1) any necessary apportionment of
payments or benefits that are referable partly to the provision of the
40
relevant services and partly to other matters is to be made on a just
and reasonable basis.
61F
Sections 61D and 61E: application of rules relating to earnings from
employment
(1)
The following provisions apply for the purposes of sections 61D and
45
61E.

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
95

(2)
A “payment or benefit” means anything that, if received by an
employee for performing the duties of an employment, would be
general earnings from the employment.
(3)
The amount of a payment or benefit is taken to be—
(a)
in the case of a payment or cash benefit, the amount received,
5
and
(b)
in the case of a non-cash benefit, the cash equivalent of the
benefit.
(4)
The cash equivalent of a non-cash benefit is taken to be—
(a)
the amount that would be general earnings if the benefit were
10
general earnings from an employment, or
(b)
in the case of living accommodation, whichever is the greater
of that amount and the cash equivalent determined in
accordance with section 398(2).
(5)
A payment or benefit is treated as received—
15
(a)
in the case of a payment or cash benefit, when payment is
made of or on account of the payment or benefit;
(b)
in the case of a non-cash benefit, when it would have been
treated as received for the purposes of Chapter 4 or 5 of this
Part (see section 19 or 32) if—
20
(i)
the worker had been an employee, and
(ii)
the benefit had been provided by reason of the
employment.
61G
Application of Income Tax Acts in relation to deemed employment
(1)
The Income Tax Acts (in particular, the PAYE provisions) apply in
25
relation to the deemed employment payment as follows.
(2)
They apply as if—
(a)
the worker were employed by the MSC to provide the
relevant services, and
(b)
the deemed employment payment were a payment by the
30
MSC of earnings from that employment;

but this is subject to subsection (3).
(3)
No deduction under Part 5 (deductions allowed from employment
income) or section 232 (mileage allowance relief) may be made from
the deemed employment payment.
35
(4)
The worker is not chargeable to tax in respect of the deemed
employment payment if, or to the extent that, by reason of any
combination of the factors mentioned in subsection (5), the worker
would not be chargeable to tax if—
(a)
the worker were employed by the client to perform the
40
relevant services, and
(b)
the deemed employment payment were a payment by the
client of earnings from that employment.
(5)
The factors are—
(a)
the worker being resident, ordinarily resident or domiciled
45
outside the United Kingdom,

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
96

(b)
the client being resident or ordinarily resident outside the
United Kingdom, and
(c)
the relevant services being provided outside the United
Kingdom.
(6)
Where the MSC is a partnership and the worker is a member of the
5
partnership, the deemed employment payment is treated as received
by the worker in the worker’s personal capacity and not as income of
the partnership.
(7)
Where—
(a)
the worker is resident in the United Kingdom, and
10
(b)
the relevant services are provided in the United Kingdom,

the MSC is treated as having a place of business in the United
Kingdom, whether or not it in fact does so.
Supplementary provisions
61H
Relief in case of distributions by managed service company
15
(1)
A claim for relief may be made under this section where the MSC—
(a)
is a body corporate,
(b)
is treated as making a deemed employment payment in any
tax year, and
(c)
either in that tax year (whether before or after that payment
20
is treated as made), or in a subsequent tax year, makes a
distribution (a “relevant distribution”).
(2)
A claim for relief under this section must be made—
(a)
by the MSC by notice to an officer of Revenue and Customs,
and
25
(b)
within 5 years after 31st January following the tax year in
which the distribution is made.
(3)
If on a claim being made an officer of Revenue and Customs is
satisfied that relief should be given in order to avoid a double charge
to tax, the officer must direct the giving of such relief by way of
30
amending any assessment, by discharge or repayment of tax, or
otherwise, as appears to the officer appropriate.
(4)
Relief under this section is given by setting the amount of the
deemed employment payment against the relevant distribution so as
to reduce the distribution.
35
(5)
In the case of more than one relevant distribution, an officer of
Revenue and Customs must exercise the power conferred by this
section so as to secure that so far as practicable relief is given by
setting the amount of a deemed employment payment—
(a)
against relevant distributions of the same tax year before
40
those of other years,
(b)
against relevant distributions received by the worker before
those received by another person, and
(c)
against relevant distributions of earlier years before those of
later years.
45

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
97

(6)
Where the amount of a relevant distribution is reduced under this
section, the amount of any associated tax credit is reduced
accordingly.
61I
Meaning of “associate”
(1)
Subsections (2) to (4) apply for the purposes of this Chapter.
5
(2)
“Associate”, in relation to an individual, means—
(a)
a member of the individual’s family or household,
(b)
a relative of the individual,
(c)
a partner of the individual, or
(d)
the trustee of any settlement in relation to which the
10
individual, or a relative of the individual or member of the
individual’s family (living or dead), is or was a settlor.
(3)
“Associate”, in relation to a company, means a person connected
with the company.
(4)
“Associate”, in relation to a partnership, means any associate of a
15
member of the partnership.
(5)
If—
(a)
a managed service company (“the MSC”) is a partnership,
and
(b)
a person is an associate of another person by virtue only of
20
being a member of the partnership,

the person is to be treated, for the purposes of this Chapter as it
applies in relation to the MSC, as if the person were not an associate
of that other person.
(6)
In subsection (2), “relative” means ancestor, lineal descendant,
25
brother or sister.
(7)
For the purposes of subsection (2)—
(a)
a man and woman living together as husband and wife are
treated as if they were married to each other, and
(b)
two persons of the same sex living together as if they were
30
civil partners of each other are treated as if they were civil
partners of each other.
61J
Interpretation of Chapter
(1)
In this Chapter—
“associate” has the meaning given by section 61I,
35
“business” means any trade, profession or vocation,
“the client” has the meaning given by section 61D(4),
“employer’s national insurance contributions” means
secondary Class 1 or Class 1A national insurance
contributions,
40
“managed service company” has the meaning given by section
61B,
“national insurance contributions” means contributions under
Part 1 of SSCBA 1992 or Part 1 of SSCB(NI)A 1992,
“PAYE provisions” means the provisions of Part 11 or PAYE
45
regulations,

Finance Bill
Schedule 3 — Managed service companies
Part 1 — Amendments of ITEPA 2003
98

“the relevant services” has the meaning given by section 61D(4),
and
“the worker” has the meaning given by section 61D(4).
(2)
Nothing in section 995 of ITA 2007 (meaning of control) applies for
the purposes of this Chapter.”
5
5
In section 218(1) (exclusion of lower-paid employments from parts of
benefits code: calculation of earnings rate), in Step 1, at the end of paragraph
(d) insert “and
(e)
in the case of an employment within section 61G(2) (deemed
employment payment by managed service company), the
10
total amount of deemed employment payments for the year.”
6
After section 688 insert—
“688A
Managed service companies: recovery from other persons
(1)
PAYE regulations may make provision authorising the recovery
from a person within subsection (2) of any amount that an officer of
15
Revenue and Customs considers should have been deducted by a
managed service company (“the MSC”) from a payment of, or on
account of, PAYE income of an individual.
(2)
The persons are—
(a)
a director or other office-holder, or an associate, of the MSC,
20
(b)
an MSC provider,
(c)
a person who (directly or indirectly) has encouraged or been
actively involved in the provision by the MSC of the services
of the individual, and
(d)
a director or other office-holder, or an associate, of a person
25
(other than an individual) who is within paragraph (b) or (c).
(3)
A person does not fall within subsection (2)(c) merely by virtue of—
(a)
providing legal or accountancy advice in a professional
capacity, or
(b)
placing the individual with persons who wish to obtain the
30
services of the individual (including by contracting with the
MSC for the provision of those services).
(4)
The supplementary provision that may be made by the regulations
includes provision as to the liability of one person within subsection
(2) to another such person.
35
(5)
In this section—
“associate” has the meaning given by section 61I,
“director” has the meaning given by section 67,
“managed service company” has the meaning given by section
61B, and
40
“MSC provider” means an MSC provider who is involved with
the MSC (within the meaning of section 61B).
(6)
Section 61C(4) (extended meaning of “associate”) applies for the
purposes of subsection (2)(d).
(7)
The Treasury may by order amend this section (but not this
45
subsection or subsection (8)).

Finance Bill
Schedule 3 — Managed service companies
Part 2 — Calculation of profits of MSCs: deduction for deemed employment payments
99

(8)
The Treasury must not make an order under subsection (7) unless a
draft of it has been laid before and approved by a resolution of the
House of Commons.”
7
In section 717(4) (orders and regulations not subject to negative procedure),
insert at the end “or section 688A(7) (PAYE regulations: managed service
5
companies)”.
8
In Part 2 of Schedule 1 (index of defined expressions), insert at the
appropriate places—

“associate (in Chapter 9 of Part 2)
section 61I (but see

section 61C(4))”

10

“business (in Chapter 9 of Part 2)
section 61J”

“the client (in Chapter 9 of Part 2)
section 61D(4)”

“employer’s national insurance
section 61J”

contributions (in Chapter 9 of

Part 2)

15

“managed service company (in
section 61B”

Chapter 9 of Part 2)

“national insurance contributions
section 61J”

(in Chapter 9 of Part 2)

“PAYE provisions (in Chapter 9 of
section 61J”

20

Part 2)

“the relevant services (in Chapter
section 61D(4)”

9 of Part 2)

“the worker (in Chapter 9 of Part
section 61D(4)”.

2)

25
Part 2
Calculation of profits of MSCs: deduction for deemed employment payments
Deduction for deemed employment payments for income tax purposes
9
In ITTOIA 2005, after section 164 insert—
“Managed service companies
30
164A
Deduction for deemed employment payments
(1)
This section applies for the purpose of calculating the profits of a
trade, profession or vocation carried on by a managed service
company (“the MSC”) which is treated as making a deemed
employment payment in connection with the trade, profession or
35
vocation.
(2)
A deduction is allowed for—
(a)
the amount of the deemed employment payment, and