Contractors hit with huge tax bills for breaching Managed Service Company rules

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Written by Caunce O'Hara
Last updated July 19, 2022

It is 12 months since the changes to off-payroll legislation on 6 April 2021 went live. Navigating IR35 still remains complicated for contractors, but is now a complexity that is added to the end-client also. On top of this, there are growing concerns over Managed Service Company (MSC) legislation on the back of a number of large tax bills up to £50,000 being handed out to over 1,000 contractors by HMRC. (2)


What is an MSC?

“A Managed Service Company (MSC) is a type of intermediary company through which workers provide their services to end-clients. The definition of an MSC in the legislation encompasses both ‘composites’ and ‘managed personal service companies’. Essentially, a scheme provider promotes the use of these companies and provides the structure to workers. The worker, despite being a shareholder (or partner), does not exercise control over the company.” (1)

What is a managed service company

What is the MSC regulation?

The MSC legislation was introduced in April 2007 to stop contractors from benefiting from the perks of operating via a limited company if the business is actually controlled by a third party – a Managed Service Company Provider (MSCP).

The legislation deems all payments received by the individual providing their services through the MSC are subject to PAYE for tax and National Insurance Contributions (NICs). This applies regardless of whether the payment is received directly or indirectly, and in whatever form in which it is received. (1)

What contractors need to be aware of is that the legislation applies even if the MSC is based outside of the UK. Therefore, if the MSC is based outside of the UK in order to avoid paying tax, it is more likely that HMRC will invoke the transfer of debt provisions to third parties. (1)

This means if the MSC cannot pay its PAYE and NIC liabilities, HMRC can transfer the MSC’s debt to a third party, which includes:

  • the company’s director/s;
  • the MSC provider;
  • some other third parties.


What is an MSC provider?

The reason for the legislation being passed is the existence of MSC providers that are ‘involved’ with a client company. A Managed Service Company provider is defined by HMRC as “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.” “Involved” is defined by any one of five activities. (1)

“For the MSC legislation to apply, the service provider must both fulfil the definition of a MSC Provider and be involved with their client companies.

It is therefore important that persons are able to determine whether:

  • They are a MSC Provider
  • The services provided as a service provider constitute being “involved”
  • The company is an MSC
  • The MSC legislation applies
  • They fall within the transfer of debt provisions and, if so, how they can mitigate their risk.” (1)


The key issue that has fueled the recent round of tax bills that have been sent out, is that HMRC has deemed that some Service Providers are telling their clients that they are not MSC Providers. They’re telling them they are accountants. Therefore, telling their clients they are not subject to the legislation.

If a service company is within the MSC legislation, but fails to operate PAYE and NICs, this can result in individuals being held personally responsible for the PAYE and NICs debts of the company and therefore face an unexpected tax bill. (1)


What if you’re a contractor who is subject to a tax claim?

According to the Financial Times, letters sent to contractors by HMRC demanded income tax for the year 2017-18. Bills ranged from £14,000 to £50,000 and were demanded to be paid within 30 days. HMRC added that National Insurance liabilities will follow, meaning those contractors affected could be hit with another large bill. (2)

What is most concerning is that it now appears HMRC are targeting contractor accountants as well as contractors. This could impact thousands of contractors who could be deemed to have breached the MSC legislation, even if they have been advised to operate in this way by their accountant. (2)

Paul Mason, Head of Tax Partnerships at Markel Tax, commented in the recent IPSE webinar from 21 April 2022, that covered ‘IR35 one year on and Managed Service Companies’: “If you are to defend yourself against a claim, you’ll need to evidence the fact that you have been running your own company and making the decisions, and have not been following direction from your accountant or other MSC provider.”




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