A managed services company (MSC) is a type of UK limited company used by contractors and self-employed workers, where workers are directors and shareholders. In the case of MSCs, it was used to reduce the possibility of tax liabilities for shareholders and directors. HMRC defines an MSC as a person who conducts a business of promoting or facilitating the use of companies to provide people's services. In addition, for MSC legislation to apply, the service provider must comply with MSC's definition of provider and be involved with its client companies.
The first activity is to benefit financially on a continuous basis from the provision of the services of the person providing those services through an MSC. Just because a person is an MSC provider does not necessarily mean that their clients' companies are managed service companies. One important piece to keep in mind is the legislation of the Managed Services Company (MSC). A managed services company (MSC) is a company that reduces its tax burden by using a personal services company (PSC) but, through the involvement of an MSC provider (MSCP), does not assume the responsibilities of running that business.
The legislation was very effective and thousands of contractors and their service providers were affected by the legislation, effectively ruling out managed service companies for contractors, and increasing the population of contractors using umbrella company solutions. To be a managed services company, in addition to meeting the first three criteria of section 61B (of the legislation), the MSC provider or an associate must be “involved” with the client company. A managed services company, in the context of the definitions defined in the HMRC Employment Status Manual, refers to a service company that provides contractors with a composite enterprise solution to manage their billing and accounting. For an MSC to exist, there must be a Managed Services Company Provider that exercises control over the MSC.
HMRC claimed that many contractors operated using composite company schemes through managed service companies, even though their status was certainly within IR35. Managed service companies are defined by HMRC as those that provide the services of individuals to third party customers and are involved. When a company is set up to provide the services of a worker to a contractor and MSC legislation applies, the amounts paid to an MSC for those services that are not yet subject to PAYE income tax and Class 1 national insurance contributions (e.g. stock dividends) are treated as labor income.
If you work with contractors, you should be aware of managed services companies, how to keep contractors protected, and the impact it could have on you. A managed services company (MSC) is a form of business structure in the UK designed to reduce the individual tax liabilities of directors and shareholders. Managed Service Company legislation effectively eliminated all tax benefits of working through an MSC by making all income subject to PAYE and National Insurance tax contributions. HMRC successfully argued that the Managed Service Companies (MSC) legislation (Chapter 9 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 and equivalent legislation on national insurance contributions) applied to agreements established and administered by a third party: Costelloe Business Services Limited.
MSC legislation is similar to IR35, in that when a PSC is considered to be a managed services company, HMRC will seek to reclassify all payments received for services provided by an individual as labor income, subject to PAYE and NIC. .