IT Contractor FAQs - Frequently Asked Questions

A Managed Service Company is a company that is provided by a Managed Service Company Provider.

Both these terms are defined by Chapter 9 of ITEPA 2003 which was amended in the Finance Act of 2007.

Why were the MSC rules introduced?

Before the introduction of the new rules, some contractors became shareholders in "composite schemes", in which they had little day-to-day involvement, but would be paid in dividends and minimal salaries. HMRC claimed that such schemes encouraged the avoidance of significant amounts of tax and National Insurance contributions. The MSC rules were created to outlaw the use of such schemes.

A Managed Service Company (MSC) cannot exist without a Managed Service Company Provider (MSCP), so most Professional Contractor or Freelancer Companies will be a Managed Service Company by definition within this legislation if a Managed Service Company Provider is involved in your Limited Company.

How to spot a Managed Service Company Provider

A MSCP will only be involved with your company if it undertakes any one of five activities in the legislation.

These activities are:-

(a) benefits financially on an ongoing basis from the provision of the services of the individual,
(b) influences or controls the provision of those services,
(c) influences or controls the way in which payments to the individual (or associates of the individual) are made,
(d) influences or controls the company's finances or any of its activities, or
(e) gives or promotes an undertaking to make good any tax loss.

You can read more in our HMRC's MSC Guidance Manual from July 2007 (PDF).

Are contractor accountants excluded?

A contractor accountant who by virtue of providing accountancy services in a professional capacity is specifically excluded from being involved in your company when they provide accountancy services, however the legislation is written in such a way that if your accountant undertakes any of the five activities above they become a MSCP and your company becomes an MSC.

If your company is defined as an MSC within the legislation, all of your income will be taxed under PAYE rules.

HMRC have issued guidance on the activities that would be counted as "influences and controls" and the manual is available on HMRC's website, but the basic assumption is that if you are controlling your company and making the decisions, your accountant will not be, and you cannot be an MSC. An accountant is not precluded from giving accountancy advice by this legislation.

However, if your accountant or anyone else, is making decisions about your company and its finances, then they may well be an MSCP and your company may well be an MSC.

You can read more in our dedicated Managed Service Company section.

About the Author

This answer was kindly provided by Phil Richards from BFCA Limited Chartered Accountants.