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Managed Service Companies

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Managed Service Companies (MSC) differ to PSCs in that an MSC manages and controls the affairs of the business, not the contractor.

The 2007 Budget legislated against MSCs by removing the associated tax advantages for contractors working through them. Prior to the government's action, there were several varieties of a MSC. 

One of the most common forms were Composite Companies, where typically up to 20 contractors became non director shareholders. The contractors received a low salary and expenses with the remainder payable as a dividend. This method of remuneration provided many financial benefits, since it avoided the payment of income tax and NICs that would otherwise be payable if the contractor was paid entirely under PAYE.

HMRC grew increasingly frustrated with the use of MSCs which, when investigated, were able to liquidate (as they had no assets) and start trading under a new company the next day. Following the MSC legislation, it is now the responsibility of a MSC provider to correctly operate PAYE and deduct the necessary tax and NI on all income payable to a contractor.

To reinforce this law, the government have permitted the recovery of any underpaid taxes from appropriate third parties; principally those behind the MSC as well as connected or controlling parties.

Some companies still offer variations on these schemes so it can be confusing to a contractor to know what is legal and what is not. The simplest way to operate compliantly is if you decide to work via your own PSC then you must run it yourself, do not delegate control or key decisions to a third party supplier.

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