HMRC releases new guidance on ‘Managed Service Companies’

HMRC has just issued new guidance on ‘Managed Service Companies’ (MSCs). They are of particular relevance to some freelancers, consultants and contractors. In this post, we summarise the guidance and explain why it’s important to comply with it.

What are Managed Service Companies?

A Managed Service Company is a business structure – typically a limited company or partnership – used by one or more individuals to provide services to clients. They are normally set up in order to lower the amount of tax a worker pays. Since 2007, legislation has prevented individuals from using Managed Service Companies in order to avoid tax. If HMRC believes someone is using a Managed Service Company, it can demand that all income is subject to PAYE and National Insurance. In addition, it can insist that you pay backdated taxes that could amount to 40% of everything earned to date.

How does HMRC define Managed Service Companies?

The new guidance states that, for a company to be deemed a Manged Service Company, it must meet four conditions. These are:

• An intermediary company that provides a worker’s services to an end client
• A worker who receives at least 50% of the end client’s money that is paid to the company in exchange for services
• A worker who receives payments that are higher than if they were taxed as employment income
• A third party who promotes or facilitates the use of Managed Service Companies is involved with the company

There are further criteria that determine whether a Managed Service Company is ‘involved with the company’. A provider is deemed to be involved if they do any one of the following:

• Benefit financially on an ongoing basis by providing services to the individual
• Influence or control the provision of the services
• Influence or control the way payments are made to the individual or their associates
• Influence or control the company’s finances or its activities
• Give or promote an undertaking to make good any tax loss.

You can find more information about these criteria in HMRC’s Employment Status Manual.

How to spot an MSC provider

HMRC notes five common signs of Managed Service Company products. These are:

• Adverts that promise to boost your take-home pay
• Encouragement for you to use a company, become a shareholder, take a salary and receive the rest in dividends
• Standardised products or solutions that are not tailored to your circumstances
• Variable product fees that go up when you work more and down when you work less
• Software that determines the most advantageous route for tax purposes (not to be confused with legitimate cloud accounting software that is sold to assist you with your bookkeeping needs)

MSC providers are not the same as traditional accountants. This is because traditional accountants will:

• Review your personal circumstances and working practices
• Suggest appropriate and compliant options based on your circumstances

This is in contrast to an MSC provider, which will normally promote a single corporate structure to all its clients.

Worried you’re not complying with MSC legislation?

If you’re worried that you may be offering your services via a Managed Service Company, it’s vital to get advice as soon as possible. Failure to do so could land you with even heftier penalties from HMRC. At THP, our expert accountants can advise you on compliant corporate structures as well as legitimate tax planning advice to lower your bills. Get in touch today to learn more.