A Managed Service Company (MSC) is an intermediary company where workers will provide services to either an employer or agency; this type of business structure has contractors put into groups of shareholders within a firm owned and run by the service provider.
This method of working was an extremely popular way for contractors to take home more of their money (when compared to PAYE), without the added pressure and responsibilities that can come with running your own business.
Managed Service Company legislation
HM Revenue & Customs were eager to ensure that people were not using Managed Service Company schemes to avoid paying employed levels of tax and National Insurance contributions.
And so, it was in 2007 that the government introduced the MSC legislation, which ultimately means that all payments received by someone working through an MSC are considered as employment income.
PAYE and NI must be applied to all income received by individuals in an MSC in relation to their services provided through the MSC, and, if an MSC is unable to pay its PAYE and NI liability, its debt can be transferred to third parties, such as the company’s directors and the MSC provider.
It’s also worth noting that this legislation even applies to an MSC that is based outside of the UK (as well as inside), as some people may try to avoid the legislation this way.
What is the definition of an MSC?
Those who are likely to be caught by the MSC legislation are contractors who allow both their business and financial responsibilities to be managed by third parties.
The definition of a Managed Service Company, as described by HMRC:
• The company’s business must consist wholly or mainly of providing directly or indirectly services of an individual.
• The individual (worker) supplying their services to the third party client receives payments (or an aggregate of payments and benefits) 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 worker.
• 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 an employment with the service company.
• For this condition to be met there must be person termed as ‘MSC Provider’, and that person must be involved with the company.
Contractors found by HMRC to be using a Managed Service Company will be required to pay income tax and NI Contributions as if they were an employee.
I’m a limited company contractor, should I worry?
No, this legislation does not target small businesses – umbrella company contractors and genuine limited company owners will not be affected by the MSC legislation.
Contractors working through an umbrella company will not be affected due to the fact they are essentially seen as being an employee of the umbrella, meaning they already pay full PAYE and National Insurance contributions.
And, as a genuine limited company contractor, you will manage and have full control over your business affairs, unlike those working through an MSC.
If you have any concerns regarding the MSC legislation and how it may affect you and your working practices, speak to your accountant, who will be able to offer you further advice.