Managed Service Company (MSC) legislation: an expert’s overview for contractors

David Harmer Markel Tax
Written by David Harmer
Last updated December 16, 2022
Main article image

To understand the Managed Service Company (MSC) rules, given the limited case law on the subject, we must dive into the legislation (found at ss61A – J ITEPA (2003), and the corresponding Transfer of Debt legislation at s688A ITEPA (2003).

The legislation is lengthy and complex, but unlike other pieces of legislation that affect contractors, the language used in its drafting is clear.

David Harmer, Associate Director at Markel Tax.


When does the MSC legislation apply?

For the MSC legislation to apply, it requires three things:

  1. A (Personal Service) Company
  2. A Provider
  3. Involvement (by the Provider in the affairs of the Company)

All three of these key elements must be present for the legislation to apply. If the legislation does apply, the company must operate the , which means applying Tax and National Insurance Contributions (NICs) to all payments.


Clarification of the ‘The Company’

For the purposes of the legislation, ‘the company’ is one in which:

  1. Its business is that of wholly or mainly providing the services of an individual to clients.
  2. The individual receives all, or the greater part, of the payment made to the company for the services.
  3. The individual receives payments exceeding that which they would have received if all payments were subject to employment income.

This effectively defines any ordinary PSC i.e. the owner/shareholder (the contractor) who provides their services and receives the majority of the payment from those services via salary and dividend. If the company is operating inside IR35, then it would not fall into this definition as all monies received would be classed as employment income.

However, it is the next element which is fundamental for application of MSC legislation.


The Provider

It is the definition within the MSC legislation which is key to the application of it. The legislation provides that the company will be a managed service company if there is also:

a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals (“an MSC provider”) is involved with the company. (1)

Where a company and provider exist, the company will be an MSC.

The definition of an MSCP can simplified, and the MSCP must be:

  1. A person (entity) separate from the company
  2. Carrying on a “business” (i.e. trading) of promoting or facilitating the use of companies for the supply of services of individuals.

Importantly, it does not have to be the “whole” of the entity that does this. If only part of that entity is trading to promote or facilitate the use of companies for the supply of individuals, then that is sufficient.

This point would exclude commercial entities, such as commercial contractors using self-employed subcontractors and umbrella companies, as these are self-contained entities that provide commercial services to clients and are not carrying on the business of promoting or facilitating the use of companies. For example, a compliant umbrella company employs individuals, and will be operating employment income on all its employees.

The MSC legislation targets those entities which market themselves to individuals, promoting that the individuals should use a limited company to provide services. The provider offers to take care of all the administrative/legal/tax burdens of operating a company. For example, “We will set you up with a limited company and we will do everything for you, you simply provide your services as you always have done.”

Where a company and a provider exist, the company is an MSC and the provider is an MSCP (Managed Service Company Provider), therefore the MSC rules are in play.

However, the legislation only ‘bites’ if the MSCP is “involved” with the MSC.


Involvement: explained

The legislation itself provides definition of “being involved”, and additional clarification of the definition comes from the Christianuyi v HMRC (2019) Court of Appeal judgment (also known as the ‘Costello Business Services case’).

While that case did not deal with the definition of an MSCP (as it wasn’t argued), it did explore the ‘involved with’ provision.  There are five statutory provisions to “being involved”:

  1. benefits financially on an ongoing basis from the provision of the services of the individual,
  2. influences or controls the provision of those services,
  3. influences or controls the way in which payments to the individual (or associates of the individual) are made,
  4. influences or controls the company’s finances or any of its activities, or
  5. gives or promotes an undertaking to make good any tax loss.

From the Christianuyi v HMRC (2019) Court of Appeal judgment, the court determined the following are examples that would bring an MSCP within “involved”.

  • being paid only when the MSC is providing services to clients
  • providing recommendation on how the MSC should take its money
  • Influencing an MSC to use a preferred banking method
  • automatic collection of monies to the MSCP
  • having control of the MSC bank account

These are only some examples, and it is important to remember these points are only considered once it’s been established that an MSC exists.


The Debt

The result of applying the MSC legislation is that the company (you, the contractor) is liable for tax and NICs on all payments for services (in much the same way as an inside IR35 decision).

It is your responsibility to pay it, your responsibility to argue your case, and your responsibility to appeal a HMRC decision. You are liable, your provider is not!

The MSC legislation also introduced its own transfer of debt provisions.

If a debt under MSC falls due (meaning appeals are exhausted and the money must be paid), it can only be transferred to another party if HMRC considers the money is unlikely to be recovered from the MSC. For example, the MSC has already closed, or has no available funds.

The first option available to HMRC in transferring the debt is the MSCP and/or the director of the MSC (you, personally). However, it isn’t guaranteed that HMRC will transfer the debt to the MSCP if your company cannot pay what is owed.


How can contractors safeguard themselves from the MSC legislation?

As a contractor you are in the firing line for unpaid tax and NICs, so it’s important that you understand how the MSC legislation can apply to you.

The legislation is not designed to catch out contractors who use the services of an accountant or legal advice (the legislation clarifies that accountants and legal advisers don’t fall within the definition of an MSCP by providing professional services).

However, there is a fine line between engaging a provider for professional services and engaging a provider to effectively run your company for you.

It would be unfair to expect every contractor to have an in-depth understanding of all tax legislation, company laws, and accounting rules. However, it is important for every contractor to understand what trading through a limited company means, including what their responsibilities as a company director, and where the company’s money is being spent.

Judging by HMRC’s activity in 2022, they view that a service-offering targeted at individuals to supply their services through companies, coupled with the use of automated online portals, is sufficient to apply the MSC legislation, on the basis there is active promotion, active facilitation, and influence over the company.

A key part of the argument is the use of an online portal for more than the contractor simply providing information to its adviser and to manage its own affairs. The argument is that the portal is used by the provider to allocate monies as the provider sees fit (in a tax-efficient way), which means the contractor isn’t running their own business, instead they are passively accepting what is being done for them.

The use of an online portal should not cause issues, however, there is an issue if a provider automatically allocates salary and dividends without consulting the contractor and without their approval.

Questions you should ask yourself…

We would encourage all contractors to be certain they understand the services they are receiving from any accountancy service provider and look out for the HMRC flags.

For example, do you need to approve all payments made by your company?

And then also answer the following five questions:

  1. Do you authorise all returns made to HMRC? 
  2. Do you have control of your company’s income? 
  3. Are you forced to use a preferred bank? 
  4. Do you only pay accountancy fees when your company is actively providing services? 
  5. Do you fully understand all the services you are receiving?

Carrying out your due diligence now, can save a lot of headaches in the future and safeguard yourself against potential HMRC liability under the MSC legislation.


If you are unsure of your position and would like assistance, book a call with one of the experts at Markel Tax. Call 0345 351 2600 to book your appointment.


Original publication, Friday 2nd Dec 2022



  1. ESM3515 – Managed Service Companies (MSC): MSC Providers – HMRC internal manual – GOV.UK (

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


David Harmer Markel Tax
Written by David Harmer
Last updated December 16, 2022

Related IR35 content

Case law examples that have helped determine employment status and IR35

While IR35 as we know it has only been in existence since it was first announced in 1999, by the…

Read more

Managed Service Company (MSC) legislation: an expert’s overview for contractors

To understand the Managed Service Company (MSC) rules, given the limited case law on the subject, we must dive into…

Read more

Contracts with overseas fee-payers: pros and cons

A question that arose from a recent contractor survey is, ‘what are the pros and cons of working with overseas…

Read more

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

It is 12 months since the changes to off-payroll legislation on 6 April 2021 went live. Navigating IR35 still remains…

Read more

What are the implications of being a UK resident, but running your company from overseas?

This subject is widely regarded as “complicated,” and if you find yourself in this position and require a detailed explanation…

Read more

What is the difference between project-based vs task-based engagements in relation to IR35?

Project-based vs task-based engagements The reason that we ask this question when reviewing an engagement is to understand the nature…

Read more

A brief explanation of the Key Information Document (KID)

Following on from our brief mention of the Key Information Document (KID) in our article “The Essential Guide to IR35…

Read more

Key stats about IR35 six months after the reform went live

Just over six months on from the April 2021 rollout of IR35 legislation to the private sector and the UK…

Read more

What do recruitment agencies need to do to protect themselves from IR35?

Recruitment agencies will be the parties viewed as being responsible for any unpaid tax as they’re considered the ‘fee-payer’ in…

Read more

IR35 and Umbrella companies – how does contracting through an Umbrella company make a difference?

When the off payroll working rules were introduced into the public sector in April 2017, it quickly became clear to…

Read more

What is my IR35 status?

As a private sector contractor operating through a Personal Service Company (PSC), you can’t afford to wait until April 2021…

Read more

Factors that determine IR35 status

IR35 v self-employment Just to clarify a key point before we begin, a contractor does not have to be engaged…

Read more

New IR35 Rules explained

After being delayed for a year due to the Coronavirus pandemic, the new private sector off-payroll working legislation (IR35) will…

Read more

How to protect against an IR35 tax investigation

If you receive a letter from HMRC regarding an IR35 tax enquiry it is important that you immediately seek advice…

Read more

What is IR35 and who does it apply to?

A useful starting point is to explore the background to the off-payroll working legislation (IR35), because the changes that came…

Read more

Can contractors working on contracts inside IR35 still work through a limited company?

The off payroll working rules, known as IR35, were rolled out into the private sector on April 6th, 2021. The…

Read more

Why end-client businesses should make their IR35 decisions now

IR35 decisions can be made now End-client businesses which engage contractors (whether directly or indirectly via agencies) must determine whether…

Read more

Fee payers: Your IR35 responsibilities and your liability

The fee payer is the party paying the contractor’s PSC; i.e. the entity directly above the contractor’s limited company in…

Read more

What to expect from a HMRC IR35 investigation

If you receive a letter from HMRC regarding an IR35 enquiry it is important that you seek advice from an…

Read more

Frequently asked questions about the IR35 in 2021

We have collated some of the most common questions asked about the IR35 changes, relevant to each area of the…

Read more

IR35 Where are we now and what does the future hold?

After the government’s postponement of the IR35 changes, the off-payroll legislation in the private sector reforms are now imminent. The…

Read more

Who pays the Piper? The Relevant Person and IR35 Debt Transfers

One of the most confusing issues with the new rules for IR35 which will come into force next April are…

Read more

6 Questions you need to ask yourself about IR35

The fundamentals of IR35 are NOT changing: understanding the key status indicators – personal service, control, and mutuality of obligations – is…

Read more

The impact on contractors of the deferral of private sector IR35 reform until April 2021

Since Steve Barclay, the Chief Secretary to the Treasury announced a 12-month delay to the IR35 private sector reform in…

Read more

Why do I need an IR35 contract review?

Get a clear explanation of your IR35 status If you are a contractor with any doubts as to the compliance…

Read more

What is a Personal Service Company?

Found across all industries, a Personal Service Company (PSC) is a company which provides personal services of a single contractor…

Read more

What is IR35 and how does it work?

IR35 – or the Intermediaries Legislation – was introduced by HMRC in 2000, and was aimed at individuals who were…

Read more

What is a contract review and do I need one?

A Contact Review is a report that independent tax specialists such as Markel Tax provide to contractors giving an opinion…

Read more

IR35 changes 2021: What you need to know

IR35 effective from April 2021 The Government has reaffirmed plans to make changes to off-payroll working (IR35) rules effective from…

Read more

What is inside and outside IR35

No statutory definition of a contract of service There is no statutory definition of a contract of service (employment contract)…

Read more

Will contractors still need insurance for IR35 after April 6th?

Amendment: On March the 18th 2020, the Government announced that the roll-out of private sector IR35 reform would be postponed…

Read more

What is IR35 and how will it affect you as a freelance contractor?

For many freelancers, IR35 sounds like another jargon term that has no relevance to them and there is a concerning…

Read more

The Right of Substitution

The right of substitution is one of the key tests of your IR35 employment status as set out by the…

Read more

Mutuality of Obligation (MOO)

Mutuality of Obligation refers to the obligation of the employer to provide work and pay for it. This is combined…

Read more

Retain your control as a contractor to keep IR35 at bay

Control is one of the three key points that is used to determine whether a contractor is working inside IR35…

Read more

The importance of an IR35 Contract Review for private sector contractors

If you are a private sector contractor, you should be fully aware of the private sector IR35 changes that are…

Read more

What is IR35 and how does it affect you?

Whether you’re new to contracting or an old-hand, the issue of IR35 is never far away.  IR35 status affects your…

Read more

PSCs inside IR35 – Keep Calm and carry out some research

A week on since the Finance Bill 2017 became law public sector contractors who operate through PSCs are facing a…

Read more

IR35 Products & services

Caunce O’Hara’s partnership with Markel enables us to offer a broad range of IR35-based products to protect contractors, fee-payers and end clients across the UK.

IR35 Hub Related IR35 content