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Managed Service Company Guide


Managed Service Companies are complex business entities that must meet very strict government guidelines for taxation and reporting. Prior to 2006, operating an MSC was fairly easy for contractors. A change in legislation in 2007 made things considerably more difficult. Our Managed Service Company guide provides a broad overview of MSC regulations and how these apply to contractors. We encourage you to use this guide to gain a basic understanding of how to operate within an MSC. Feel free to speak with your account manager or dedicated accountant if you have further questions.


MSC Legislation


In 2006, the government implemented what has come to be known as the Managed Service Company (MSC) legislation for the purposes of putting a stop to contractors and limited company shareholders avoiding taxes by consolidating their activities under a managed service provider. Prior to the legislation, working with a managed service provider allowed contractors to enjoy the tax efficiencies of operating a limited company without much of the responsibility that went with it. Such is no longer the case.


The Treasury took specific action with the MSC Legislation that allowed it to recover NIC and PAYE debts from questionable service providers and to close loopholes that enabled such providers to avoid paying the taxes in the past. The most important part of the legislation dictated that workers employed by companies utilising managed service providers were subject to the same PAYE and National Insurance deductions as other workers, and that companies were equally responsible for their portion of National Insurance contributions.


A second version of the legislation implemented in 2007 applies all of the rules from 2006 to both individuals and limited companies working for MSCs.


MSC Definition


A Managed Service Company is a legal entity providing business administrative services to contractors, freelancers and the self-employed. In order to be a legal MSC, the service provider must meet the following four conditions:


  1. The provider must facilitate the offering of client (contractor) services to third party clients (customers), either directly or indirectly.
  2. The contractor must receive payments from the service provider equal to the greater part of the sums received by the provider from the customer.
  3. The payments received by the contractor must be greater than they would have been if all of the payments were treated as employment income directly from the service company.
  4. An individual must be appointed as ‘MSC Provider’ and must be actively involved in the business.


The legally appointed MSC Provider is an individual primarily responsible for carrying out the business of the provider company in offering and facilitating the services of the contractor. An individual who only markets contractor services and/or provides corporate solutions to those contractors is not a legal MSC Provider. There must be a clear facilitation of services between contractor and customer to constitute the services of an MSC Provider.


Furthermore, a legal MSC Provider can have some contractor clients for whom qualifying services are not being provided. Just because a contractor, freelancers or a limited company works with a legal MSC Provider does not mean that Provider's services are covered under the MSC legislation.


For these two reasons, we strongly urge contractors and limited company directors to stay away from MSC providers. There are too many risks involved, risks that could wind up in penalties, higher taxes, and additional trouble.


Involvement Requirement


Under the law, a person claiming to be an MSC Provider must be involved directly in the facilitation of services between contractor and customer. There are five scenarios under which a Provider would be considered legally involved:


  1. A Provider is involved if his/her income is derived from charges linked to a percentage of the client's income. In other words, the Provider is being paid on a commission basis.
  2. A Provider is involved if he/she controls or influences how contractor services are provided to the customer, without maintaining absolute control over the contractor's business.
  3. A Provider is involved if he/she exercises influence or control over how a customer pays a contractor. However, under this scenario the officers of a limited company still exercise control over how distributions are made.
  4. A Provider is involved if he/she exercises material control or influence over a limited company's finances and/or activities. Company officers are legally independent, but they utilise the Provider for guidance and advice.
  5. A Provider is involved if he/she is undertaking or promoting any efforts to make good on a contractor's tax loss. There are multiple ways this scenario could be exercised.


The Financial Secretary of the Treachery issued a long list of business activities in 2007 that would generally constitute not being involved as a legal MSC Provider. You can get a list of these activities, along with additional information about MSCs, by visiting the HMRC website.


Tax Efficiency


The structure of the MSC legislation includes some important provisions that make doing business this way no longer tax efficient. Contractors and limited company owners need to know the following:


  • Payment Recovery – In the event HMRC unsuccessfully attempts to collect PAYE or NIC debts from an MSC, they have other options. They can go after a limited company director, or they can transfer that debt to a new MSC provider or another third party with an interest in the company.


  • MSC Location – All payments received by MSCs are subject to PAYE and NIC contributions, whether located in or outside of the UK, if shareholders live principally in the UK and the majority of their business is conducted here.


  • Additional Tax – Despite the legislation, there are still some MSCs not compliant with PAYE and NIC requirements. Ignorance is no excuse in the eyes of the government. If the directors of a limited company are found to be working with non-compliant MSCs, they can be liable for additional tax and penalties regardless of any level of ignorance.


It is of vital importance that you thoroughly examine an MSC for tax compliance before agreeing to do business with one of these service providers. The risks of being caught working with a non-compliant service provider are risks you do not need to take.


Contact Us First


If you have any inclination of setting up your limited company and working with an MSC, we urge you to contact us first. As this overview clearly shows, the tax advantages of working through an MSC are not high enough to make this a tax-efficient strategy. Likewise, the risks of running afoul of the law are too great.


Contact ICP for a better and more tax efficient business strategy. We can help you set up your limited company in a way that is most advantageous to your circumstances. There is no need to work through an MSC when our flat rate service provides all the support and accountancy services you need to thrive as a contractor.

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