Managed service company legislation

This page provides an introduction to managed service company legislation and how it affects interim managers and users of interim services.

It has become increasingly common for workers' services to be provided to end clients via individual Management Service Companies (MSCs). Some MSCs are set up by employment agencies in certain industry sectors, whilst others are provided by businesses offering generous tax savings to workers.

The MSC structure has often been used to avoid paying PAYE and national insurance contributions on an employee basis. HMRC rules already existed covering the collection of tax in this situation, but concern that the rules were not being complied with, plus the growth of MSCs, has led to a crackdown by the Government.

The 2007 Budget introduced legislation under which all payments received by a worker in a MSC will be subject to PAYE and Class 1 national insurance contributions. Where HMRC is unable to recover such sums from the MSC, it will also be able to transfer the debt to certain third parties, including an MSC Provider which is “involved” with the company. The new legislation already defines the concepts of “MSC” and “MSC Provider” and lists situations in which an MSC Provider would be regarded as being involved with the MSC.

On 10 July 2007, HMRC published guidance to clarify aspects of the legislation seen as ambiguous.

• The legislation will only apply where there is an “MSC Provider” which is “involved” with a client company
• To be an “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 guidance makes it clear that, for example, a firm of accountants which is merely carrying on business as accountants will not fall within this definition, even if many of its clients are individuals operating through service companies. But if a discernible part of the firm's business is to specifically market and/or provide corporate solutions and services to such individuals that will make the firm a MSC Provider. Similarly, any business which specifically markets corporate solutions and services to individuals providing their services to end users is likely to be a MSC Provider
• The guidance also gives further detail on the operation of the transfer of debt provisions
• HMRC has also provided further clarification in an article on the HMRC website in response to a growth in intermediary companies which are marketed to individuals for the provision of their services to clients. The article confirms that HMRC will regard such intermediary companies as MSCs if they satisfy the definition of an MSC in the legislation even if the provider of the intermediary company is an officer or partner of the intermediary and even if the intermediary company is based outside the UK.

What does this mean for interim managers?

Similarly to IR35, interim managers should be aware that the MSC legislation will apply to them if they are contracted largely or exclusively through an MSC Provider and HMRC will regard the MSC legislation as applicable even if the provider is an officer or partner of the intermediary company. Interim managers should ensure they seek independent tax advice as appropriate.

What does this mean for interim services?

Essentially, the tax burden of such an arrangement will rest in the first instance with the intermediary as opposed to their client. However, given the provisions for HMRC to recover monies owing from third parties where the tax burden is not discharged by the MSC, clients should take independent tax advice where they receive services under MSC arrangements.

Where can I find out more?

Read the guidance from HMRC and the HMRC article.

Alium believes this information may be of use to anyone operating through a service company, service providers and anyone doing business with such companies.

The contents of this article are intended for general information purposes only and shall not be deemed to be or constitute legal advice. The summaries represent our understanding of the law as at November 14th 2007 and it is subject to change at any time. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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  • Intermediaries Legislation (IR35)
  • Conduct of Employment Agencies and Employment Business Regulations 2003
  • The Data Protection Act 1998
  • Managed service company legislation
  • The Money Laundering Regulations 2007
  • The UK Bribery Act 2011