Managed service companies overview

By Tolley

The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Managed service companies overview
  • What are 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
  • HMRC examples of MSC providers
  • Transfer of debt rules
  • Travel expenses of MSC workers

What are managed service companies (MSCs)?

Many people supply their services to clients, not directly as a self-employed person, but via a company, known as a personal service company (PSC). The tax and NICs advantages of this way of working are significant. See the Personal service companies overview guidance note. Where a personal service company is owned by the individual worker, it is likely to be caught by the PSCs legislation, commonly known as ‘IR35’. See the Anti-avoidance rules: “IR35” guidance note. In the years following the introduction of that legislation, a number of providers began to offer PSCs to a wide range of individuals. These providers usually supplied the workers with a contract with clauses designed to avoid IR35, whilst still delivering many of the benefits of a personal service company.

The providers also dealt with the onerous elements of running a company, such as calculating 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 MSCs, in contrast to PSCs where it is the individual who runs the business.

To counter what HMRC saw as unacceptable avoidance of PAYE and NICs, the legislation now includes a special tax regime for MSCs.

Outline of MSC legislation

If a company is an MSC, the PSC (IR35) provisions are suspended. Instead, workers in MSCs are deemed to be within PAYE and NICs for all of their receipts, including dividends. For this purpose receipts can include both monetary payments and benefits.

ITEPA 2003, ss 61A–61J; SI 2007/2070 (subscription sensitive)

In addition, the reliefs for travel expenses are limited, so that the expense of any travel by the worker to and from the client's premises is normally not deductible for tax purposes. This is in contrast to the more generous rules which apply to

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