Managed Service Company (MSC) rules: a contractor’s guide

The 2007 MSC legislation was created to target the use of contrived corporate structures that provided (mainly) professional workers with the tax benefits of working through a limited company, without the responsibilities.

The introduction of the MSC rules was highly effective, resulting in the overnight disintegration of the ‘composite’ company market, which had been a popular business model for contractors (see below).

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

Both these terms are defined in Chapter 9 of ITEPA 2003, as amended by the Finance Act 2007. See the legislation here: https://www.legislation.gov.uk/ukpga/2003/1/part/2/chapter/9

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 were paid 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 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.

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 listed below, they become an 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 has 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.

Keep on reading to find out more about recent developments.

Recognising an MSC Provider

Contractors working via a limited company need to be able to recognise an ‘MSC Provider’ who is “involved with the company” under the published legislation.

According to the legislation, there are five tests that define an ‘MSC Provider’ as being “involved with the company” and of which only one has to be relevant for the legislation to apply.

Contractors can look at the following practical elements to assess if an ‘MSC Provider’ is “involved with the company”:

a) Benefits financially on an ongoing basis from the provision of the services of the individual.

An MSC Provider could be involved if they:

• Receive a percentage fee of the income of the Managed Service Company or individual.
• Receive a fee when the worker provides the services, and do not receive a fee when the worker does not provide the service.
• Invoices for an individual’s services are then paid to the limited company, less its administration fee.

b) Influences or controls the provision of those services.

An MSC Provider could be involved if they:

• Arrange the contracts for service between the MSC Provider and the staffing company/end-client.
• Are involved with the arrangement of the contracts for service, the negotiation of rates and/or terms of the contract.
• Are involved in ensuring the contractor attends the worksite or enters into any dispute resolution.

c) Influences or controls the way in which payments to the individual (or associates of the individual) are made.

An MSC Provider could be involved if they:

• Have control over the company bank account, or have access to the company bank account, or make any payments.
• Calculate Payroll, Dividends, and Expenses from the MSC’s income, and then instruct the contractor on what to pay themselves from the company bank account.

d) Influences or controls the company’s finances or any of its activities.

An MSC Provider could be involved if they:

• Calculate how much a contractor has earned from an invoice, and instruct the contractor on how much to pay themselves from their company.

e) Gives or promotes an undertaking to make good any tax loss.

An MSC Provider could be involved if they:

• Introduce a contractor, and/or their company, to an insurance scheme, guarantee, or any form of protection from the loss of the payment of tax that would result to a freelancer where they are challenged successfully by HMRC, e.g. IR35, VAT and PAYE insurance.

Recent developments

2019 – HMRC wins MSC case at CoA

After over a decade under the radar, a 2019 court case brought the MSC legislation back into the headlines – albeit briefly.

HMRC won a case at the Court of Appeal – Christianuyi & Others v. HMRC.

In this case, Costelloe Business Services (CBS) was found to be an MSCP due to its involvement in its clients’ affairs.

CBS set up limited companies for its contractor clients and exerted a high level of control over these companies once they were operating; the same company secretary acted for all of the clients, payments for work were made into a business bank account controlled by CBS, and CBS calculated and made salary/dividend payments to its clients’ personal accounts.

Clearly, this was a very strong case in HMRC’s favour, and it is unsurprising that they won.

2022 – contractor accountancy firms targeted

Again, things were quiet on the MSC front for several more years, until 2022.

In early 2022, limited company contractor clients of two mid-sized contractor accountancy firms began receiving ‘determination’ letters from HMRC claiming back taxes for the 2018/19 tax year.

The letters follow allegations by HMRC that these firms were, in fact, MSCPs, rather than accountants working at arm’s length from their clients’ limited companies.

You can read more about these recent developments here.

2024 onwards – HMRC Spotlight 67 guidance

HMRC issued Spotlight 67 in November 2024 (with minor updates in early 2025), which highlights ongoing risks of Managed Service Companies and warns contractors about schemes that reduce tax through contrived intermediary structures.

It reinforces that legitimate professional accountancy services (at arm’s length, without control over finances, payments, or decisions) are not caught by the rules, but any involvement in the five tests above can trigger MSC status.

Enforcement continues to target arrangements in which providers exert undue influence, potentially resulting in large tax bills (including back taxes, penalties, and interest) for affected contractors.

For full details on the latest HMRC guidance, see our recent news piece.

You can also read HMRC’s official Spotlight 67 here.

Conclusion

Contractors working through their own limited companies need to know whether their accountant is providing services in a “Professional Capacity”.

To do this, contractors should ensure that they:

1. Know their accountant and the services they provide.
2. Recognise what an MSC Provider is.
3. Accept responsibility for their limited company.
4. Instruct an accountant acting in a professional capacity.
5. Ultimately make the final decisions.