Managed Service Company (MSC)

We all know about the traditional methods of operating for contractors (limited company, sole trader, and umbrella company) but up until 2007 there was an alternative method of trading for a contractor, this was to use a Managed Service Company (sometimes referred to as a composite company).

Under this structure a number of contractors were placed into a group of shareholders all working through one company owned and run by the managed service provider, thus meaning they (the contractor) get all the tax advantages of operating a limited company but without the responsibility.

Some unscrupulous MSC Providers failed to pay taxes to HMRC, who were concerned about the lost revenue, so in December 2006, they announced that they would be bringing in measures to remove the tax advantages of using these schemes. The proposals included measures to enable them to recover PAYE and NIC debts from third parties.

To quote the Treasury, the following extract taken from their document ‘Tackling Managed Service Companies’ clearly shows their intention of the legislation:

‘The Government is taking action to tackle Managed Service Company (MSC) schemes which are used to avoid paying employed levels of tax and NICs. Income received by workers in MSCs in relation to services provided through the MSC will be subject to employed levels of tax and NICs, with the MSC obliged to operate Pay As You Earn (PAYE) and deduct tax and Class 1 NICs on that income - and the rules for tax relief for travel expenses will be the same as for other employed workers. The Government will also address the problem of MSCs escaping payment of tax and NICs due by allowing the recovery of these debts from appropriate third parties.

This will protect the Exchequer and ensure a level playing field for compliant businesses and workers. The Intermediaries legislation (IR35) will remain in place for Personal Service Companies."

On 6 April 2007 Chapter 9 ITEPA 2003, more commonly known as the Managed Service Company (‘MSC’) legislation, was introduced. The MSC legislation applies to individuals providing their services through intermediaries which meet the definition of an MSC.


All payments received by individuals providing their services through MSCs are subject to PAYE and National Insurance contributions and the MSC legislation applies equally whether an MSC is based within or outside the United Kingdom.

Where the PAYE and NICs debts of an MSC cannot be recovered from the company, HMRC may transfer the debt personally to one of the following:

  • The company’s director
  • The MSC Provider or
  • Other third parties such as agencies

Due to this legislation, MSCs are no longer a tax-efficient way of operating.

However, care should be taken because there are companies operating MSCs and not operating the full PAYE model without tax relief on expenses and thus are in breach of the legislation. You may well be liable for additional tax if you operate through this model (even if you were not aware you were breaching the rules).

What is a Managed Service Company?

For a company to be a Managed Service Company it must fulfill all four conditions of Section 61B (1), Chapter 9, Part 2ITEPA, these conditions are:

  1. The company’s business must consist wholly or mainly of providing directly, or indirectly, services of an individual to third-party clients
  2. The individual supplying their services to a third-party client receives payments from the service company equal to the greater part of the sums received by the service company from the client for the services provided by the individual
  3. The payments received by the worker are greater than they would have received if all of the payments were treated as employment income of the worker relating to employment with the service company
  4. There must be a person termed a ‘MSC Provider’ and that person must be involved with the company.

MSC Provider

To be a MSC Provider a person must be carrying on a business of promoting or facilitating the use of companies to provide the services of individuals.

The following is not an MSC Provider by virtue of the activate described:

A Service Provider carrying on a business specifically of marketing and/or providing corporate solutions and services to individuals providing their services to end clients

MSC Provider involved with the company

Simply because a person is an MSC Provider does not necessarily mean that their client companies are Managed Service Companies.

HMRC is aware that there is a market for specialist service providers providing corporate solutions to workers genuinely in business on their own account. Whilst such specialist providers may be MSC Providers, it is important to remember that a key issue is whether the services provided constitute being involved with the client company.

To be a Managed Service Company, in addition to fulfilling the first three criterion in section 61B (1) of the legislation, the MSC Provider, or an associate must be ‘involved with’ the client company. service companies)

'Involved' is defined in the legislation by reference to any one of five activities:

Activity 1

The first activity is that of benefiting financially on an ongoing basis from the provision of the services of the individual who provides those services through an MSC. The main example of this would be if the provider charged their fees based on a percentage of the client’s income, rather than a fixed standard fee, not determined by the level of the client’s income.

Activity 2

The second activity is that of influencing or controlling the provision of the services of the worker. If the provider is involved with the way their services are provided, such influence or control is not indicative of a relationship between a provider and a person genuinely in business on their own account.

Activity 3

The third activity is that of influencing or controlling the way in which payments to the worker or an associate are made. The company’s officers should determine how the company distributes its profits. Whilst the provider may provide advice, the decision on profit distribution must be made by the company’s officers.

Activity 4

The fourth activity is that of influencing or controlling the company’s finances or any of its activities. A company’s officers should, independently of any external influence, determine how the company, as a separate legal entity, and its finances, are administered. Such decisions should have regard to all the relevant factors pertinent to the company and to the company officers’ legal obligations. Where there is no such independence, and that is not simply a matter of presenting illusions by some structural changes, HMRC’s view is that both the company and its finances are being influenced and controlled.

The clients should be free to choose their own banking arrangements, a provider who insists on using a particular bank would be seen as being involved with the client company.

Activity 5

The fifth activity is that of giving or promoting an undertaking to make good any tax loss. Prior to April 2007 the typical MSC scheme offered the client an ‘IR35 proof’ model. Sometimes that came with insurance, with the guarantee that if HMRC successfully challenged the IR35 proof status of the company, there would be no financial consequence for company or worker.

Where, subsequent to April 2007 an MSC Provider or an associate either offers insurance against the tax/NIC liabilities arising under the MSC legislation, IR35, or indeed any other provision of the Tax Acts or National Insurance legislation, they will be involved with those client service companies to which they either offer or promote such insurance.

Meaning of 'Influences'

In this context ‘influences’ does not mean the provision of advice.

The Financial Secretary to the Treasury said in Parliament on 15 May 2007:

"There is a distinct difference…..between a person who provides independent, tailored advice to a client, who is then able to consider that advice before accepting it or rejecting it, and the person who simply supplies a client with a standard solution or product that the client accepts.”

What services are considered to comprise being involved and which are not.

Indicators of services that would generally not constitute being involved:

  • Managing company formation and set up
  • Acting as the client company’s Registered Office
  • Registering companies for VAT, Corporation Tax and PAYE
  • Preparing VAT, Corporation Tax and PAYE returns
  • Providing advice on whether IR35 (Chapter 8 ITEPA) applies to a particular engagement
  • Advising on a remuneration package
  • Advising on expense claims
  • Preparing invoices
  • Submitting invoices to clients of a company
  • Operating a payroll
  • Preparing weekly/monthly payslips and producing employers’ payroll returns, such as P35 & P11Ds
  • Preparing management accounts and financial statements
  • Providing support on secretarial matters, such as drafting of minutes and preparing annual returns
  • Providing group insurances (including employers and public liability)

Indicators of services that may constitute being involved, depending on the scope of the activity:

  • Maintaining cash balances on behalf of Personal Service Companies to meet Corporation Tax, PAYE, and VAT liabilities
  • Companies using the cash balances held

Here to help

Caroola is one of the few contractor accountants that has never operated as an MSC Provider or even provided umbrella company options. We have been independently audited to verify that we are not caught by the MSC legislation.

It is worth a check that your accountant has never been an MSC provider and that if they have, they no longer operate as such.

Let's talk

Let's talk!

Interested in finding out more? Speak with our expert Sales Team to see how we can work together.

Here's how you can get in touch...

Existing client?
If you're already a client of ours, you can speak to your dedicated accountant directly.

Alternatively, call us on 03330 342 480