The Big Bad Managed Services Wolf

24th September 2013
Written by Qdos Contractor

How worried should agencies really be about the Managed Service Company legislation?


Since the introduction of the Managed Service Companies (MSC) legislation in 2007, little publicity has been given to HMRC activity in this area during the last 6 years. This is because there has not been a lot to write home about and any significant tax case has yet to materialise. Indeed, the way the legislation was designed and written meant that HMRC had to do very little in those earlier years due to the major providers of composite company solutions calling it a day as soon as the law hit the statute books.


It appears though that something has stirred the sleeping giant as MSC enquiries have substantially increased in number since April 2012. Following two Freedom of Information requests, recruitment law firm, Lawspeed, were able to glean that the number of live MSC enquiries as at April 2012 stood at 216. Seven months down the line however and a further 644 enquiries were initiated, taking the total to 860 as at November 2012.


Since April 2011, 142  third party debt transfer notices have been issued.


What is an MSC?


An MSC is basically a personal service company (but can also be a partnership) with the added requirement that an MSC provider (MSCP) is involved with that company.


What is an MSCP?


An MSCP is defined as a “person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.”


Not surprisingly, 'promotion' and 'facilitating' have wide meanings.




Just because a person is an MSCP does not automatically mean that their corporate clients are MSC's and that the legislation applies. The key test is whether or not the MSCP is 'involved' with their client which is determined by reference to any one of five specified activities. Three of these tests are mainly to do with the MSCP having influence or control over its client's business, with the other two being providing or promoting tax loss insurance and the way the MSCP charges its fee. 




Legislation specifically exempts employment businesses and agencies provided they do not stray from their core business of placing work seekers with end clients.


Where an employment business/agency strays into MSCP territory however the exemption can no longer be relied upon and HMRC list a number of situations in their MSC guidance where employment businesses could fall foul of the legislation, these being:


  • The employment business/agency demonstrably provides structures (companies or partnerships) through which contractors operate, and provides services to those companies/partnerships to the extent they would be considered “involved” , then that employment business/agency would be an MSCP; OR
  • The employment business/agency acts in concert with someone who is an MSCP for the purposes of securing that a contractor's services are provided via a company, then that employment business/agency would be an associate of an MSC; OR
  • The employment business/agency encourages an individual to operate through an MSC and/or beyond the mere placing of the worker's company with end clients and functions directly linked to such placing, or is otherwise actively involved in the MSC's provision of the worker's services, then it could render itself liable for the transfer of any PAYE and NIC debt of the MSC (see below). 

What about preferred supplier lists?


Referral of workers to preferred suppliers does potentially increase an employment business/agency's risk in terms of transfer of debt. However, HMRC does not wish to discourage the use of preferred supplier lists as it recognises that these have a legitimate function.


In determining whether referral by an employment business/agency of a worker to a preferred supplier might constitute encouragement, HMRC will consider all of the facts relating to that referral to establish whether the underlying motive was that of encouraging the worker into an MSC. For example, HMRC would consider whether the employment business/agency had taken reasonable steps to satisfy itself regarding the status of the provider, subject to the fact that only limited information may be available.


To help employment businesses/agencies decide whether a preferred supplier may be an MSCP HMRC list a number of indicators in their MSC guidance.


Consequences of the legislation applying



Where the MSC legislation applies then basically all the income received by the MSC is treated as employment income subject to PAYE and NIC. Quite a blow if the majority of the client's profits have been extracted by way of dividends.


The resultant PAYE and NIC is calculated by reference to the 'deemed employment payment'. Unlike the IR35 deemed payment calculation there is no 5% flat rate deduction and it is extremely difficult to claim ordinary employment expenses. In fact falling within the IR35 legislation is more preferable!


Third party debt transfer


Once the tax and NIC debt has been established HMRC will seek payment from the MSC but where the Revenue certify that an MSC's PAYE and NIC debt is irrecoverable from the MSC they can seek collection from a number of parties including the director of the MSC, the MSCP or its directors and even agencies, as associates, if they have been colluding with the MSCP in some way.


It is this part of the legislation that is the real sting in the tail.


HMRC strategy


HMRC's specialist MSC unit will initially target the MSCP and carry out an investigation into its business and the way it interacts with its corporate clients. A sample of MSC's will be looked at and if the MSCP is involved with all of those clients in an identical fashion then HMRC can assume that all other clients are MSC's.


HMRC will then issue enquiry notices to each of the MSC's which also notifies of the PAYE and NIC arrears. Whilst the MSC has the right of reply the chances of putting up a successful defence are very slim unless they can prove that their relationship with the MSCP was distinctly different to that which HMRC has already established.


Is your business at risk?


If all you are doing is pursuing a business of finding work for those seeking work and perhaps services that are merely ancillary to your core business then you need not fear the big bad MSC wolf. It is only when you stray from that path that danger may be lurking.


The full MSC guidance can be downloaded by visiting


Qdos Contractor
Written by
Qdos Contractor
Award-winning providers of insurance for the self-employed, Qdos are the leading authority on IR35, offering industry-leading employment status services to ensure the flexible working industry thrive. Qdos are the Best Contractor Insurance Provider 2022 and won the Queen’s Award for Enterprise in Innovation 2022 and 2017. 

Have a question?

Ask away! One of our team will get back to you!

Prefer to talk to us in person?

Call our team on 0116 269 0999 or we can call you back at a time that suits you!