Managed Service Companies: A Recruiter’s Guide

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As a recruiter, your top priority is your clients. That’s why it’s important that you’re up to date on any relevant legislation which could affect them. One important piece which you may need to be aware of is the Managed Service Company (MSC) legislation.

If you work with contractors, you should be aware of Managed Service Companies, how to keep contractors protected and what impact it could have on you.

What is a Managed Service Company?

Prior to 2007, Managed Service Companies were advertised as a way to increase a worker’s take home pay without the responsibilities of running a limited company, they became popular for a period. Under an MSC, the contractor would be paid a basic salary and the remainder in dividends, the sole purpose of which is to minimise their tax liability.

For an MSC to exist there must be a Managed Service Company Provider which exerts control over the MSC. An MSC provider is defined as ‘a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.’

What is the Managed Service Company legislation?

The Managed Service Company legislation was introduced in 2007 as a way to stop contractors benefiting from the tax advantages of running a limited company without taking on the risks and responsibilities of being in business on their own account. The legislation prevents multiple contractors from being paid through a single company (a composite company) whilst not truly being self-employed and having none of the responsibilities that come with working through their own limited company.

Managed Service Company legislation effectively stripped away all of the tax benefits of working through an MSC by making all income subject to PAYE Tax and National Insurance contributions.

Why do I need to be aware of Managed Service Company legislation?

Due to the difficulties associated with recovering debt from individual MSC’s the government included debt transfer provisions with the MSC legislation. The MSC’s typically had no assets and so they could quickly liquidate and start a new company the next day. In order to combat this, the government established the Transfer of Debt Provisions as a means to reclaim any unpaid tax.

The Transfer of Debt Provisions states that the responsibility to pay unpaid tax and National Insurance will firstly fall to the MSC. However, if the MSC doesn’t pay back the costs within a reasonable time, HMRC has the power to transfer these costs to other companies and individuals. This can include the directors of the business, the MSC Provider or associated persons or other third parties. Recruitment agencies that fail to prevent their contractors from using MSC’s could also be put at risk.