Managed service companies

By Tolley
OMB_tax_img4

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Managed service companies
  • Personal service companies (PSCs)
  • The growth of managed service companies (MSCs)
  • Outline of MSC legislation
  • Definition of an MSC
  • When an MSC provider is ‘involved with the company’
  • Lawyers, accountants and recruitment businesses
  • Tax advisers
  • HMRC guidance
  • Transfer of debt rules
  • Travel expenses of MSC workers

Personal service companies (PSCs)

Many people supply their services via a ‘personal service company’. Working in this way can provide significant savings in tax and NICs ― see the Introduction to personal service companies guidance note.

Personal service companies are required to pay extra tax and NICs if the engagements undertaken are within IR35 or public sector body intermediary rules. See the Personal service company rules and the Intermediaries and the public sector guidance note.

The rules are complex, and depend on the status tests ― see the Employed or self-employed guidance note. There are lots of grey areas in the status tests, and this makes it difficult and time-consuming for HMRC to enforce them properly.

The growth of managed service companies (MSCs)

In the years following the introduction of IR35, a number of providers began to offer personal service companies to a wide range of individuals. These providers usually supplied a contract with clauses designed to avoid IR35. See the Implications for intermediaries guidance note.

The providers also dealt with the onerous elements of running a company, such as administering PAYE, profits and dividends, and dealing with both Companies House and HMRC. Companies with external providers who supplied these all-encompassing services became known as ‘managed service companies’, in contrast to PSCs, where the individual really ran the business.

As a result, new legislation was introduced enacting a special tax regime for MSCs.

Outline of MSC legislation

If a company is a MSC, IR35 is suspended: instead, workers within MSCs are deemed to be within PAYE and NICs for all of their receipts, including dividends.

ITEPA 2003, ss 61A–61J; The Social Security Contributions (Managed Service Companies) Regulations 2007, SI 2007/2070 (subscription sensitive)

In addition, the reliefs for travel expenses are limited, so that any travel to and from