Managed Service Company (MSC)

Read our guide to know about Managed Service Company and the reason for being no longer tax efficient for contractors.

What is a MSC?

Since there were traditional methods of operating for contractors (Limited Company, Sole Trader and Umbrella Company) but till 2007 there was an alternative method of trading for a contractor, this was to use a Managed Service Company (also known as composite company).

Under this structure a group of shareholders were formed from a number of contractors who work through one company owned and run by the managed service provider, thus means they(the contractor) obtains all the tax benefits of operating a Limited Company but without the responsibility.

Some deceitful MSC providers failed to pay taxes to HMRC, who were apprehensive about the lost revenue, so in December 2006 they declared that they would be introducing some measures for removing the tax advantages of using these schemes. The proposals involved measures for allowing them to recover PAYE and NIC debts from third parties.

To excerpt the Treasury, the following extract taken from their document ‘Tackling Managed Service Companies’ clearly exhibits 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, also known as the Managed Service Company (‘MSC’) legislation was introduced. The MSC legislation is also applicable on the individuals which provide their services through intermediaries for meeting out the definition of a MSC.


Individuals get their payments as against the services provided through MSCs are liable to PAYE and National Insurance contributions and the MSC legislation administer equally whether an MSC is based inside or outside the United Kingdom.

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

  • The MSC Provider or
  • Other third parties (agencies perhaps).
  • The Company’s director

Because of this legislation, MSC’s are no longer a tax efficient method of working.

However, extensive care should be taken because there are companies running MSC’s and not running the complete PAYE model without tax relief on expenses and thus are in violation of the legislation. You may well be accountable for additional tax if you run through this model (even if you were not familiar with you were violating the rules).

What is a Managed Service Company?

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

  • The company's business must comprise entirely or for the most part of providing directly, or indirectly, individual services to third party clients.
  • The individuals providing their services to a third party client get their payments from the service company equivalent to the larger part of the sums obtained by the service company from the client for the services offered by the individual.
  • The payment which the worker gets exceeds the sum they would have obtained if all of the payments were considered as employment income of the worker associated to an employment with the service company.
  • The person termed must be a ‘MSC Provider’ and that person must be engaged with the company.

MSC Provider

A person to be a MSC provider must carry out their business of promoting or enabling the use of companies for offering the services of individuals.

The following are not a MSC Provider in lieu of the activate described:

A Service provider performing a business particularly of marketing or offering corporate solutions and services to individuals offering their services to end clients.

MSC Provider involved with the company

Just because a person is an MSC provider does not imply that their client companies are Managed Service Companies.

HMRC is familiar with that there is a market for specialist service providers who offer corporate solutions to workers absolutely in business on their own account. Although such specialist providers may be MSC Providers, it is significant to be aware of the core issue whether the service offered consist of being involved with the client company.

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

Standardized services that would usually not constitute being involved:

  • To manage company formation and set-up
  • Acting as the client company’s Registered Office
  • To register companies for VAT, Corporation Tax and PAYE
  • Preparation of VAT, PAYE Returns and Corporation Tax
  • Giving advice on whether IR35 (Chapter 8 ITEPA) applies to a specific engagement
  • To advice on a remuneration package
  • To advice on expense claims
  • Preparing invoices
  • Submission of invoices to clients of a company
  • Running a payroll
  • Preparing weekly/monthly pay slips and producing employers’ payroll returns, such as P35 & P11Ds
  • Preparation of management accounts and financial statements
  • Offering support on secretarial matters, such as drafting of minutes and preparing annual returns
  • Offering group insurances (including employers and public liability).

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

  • To maintain cash balances in the interest of Personal Service Companies for meeting out Corporation Tax, PAYE and VAT liabilities
  • Companies using the cash balances held.

Nexa Accountants is one of the contractor accountants that has never worked as a MSC Provider or even provided Umbrella Company options. We are the specialist accountants and have been independently audited to confirm that we are not caught by the MSC legislation.

It is good to check whether your accountant has never been a MSC provider and if they have, they no longer are allowed to operate as such.