Debitoor's accounting dictionary
Managed service company (MSC)

Managed service company (MSC) - What is a managed service company?

A managed service company is a type of UK limited company used by contractors and self-employed persons, where workers are directors and shareholders.

Not sure of which business structure to choose? Check out our small business guide on how to choose the right business structure.

Managed service companies were introduced in the UK in 2000, when HMRC brought the IR35 legislation into effect.

The IR35 legislation, along with the introduction of the MSC business structure was aimed at reducing the possibility of tax evasion. In the case of MSC, it was used to reduce the chance of tax liabilities of shareholders and directors.

Although MSC’s are not recognised as a legal business structure, the term is often used to describe limited companies where workers are appointed as shareholders and/or directors of the company.

What is the difference between a managed service company and a personal service company?

Both MSC’s and PSC’s are types of limited companies that were introduced due to the IR35 legislation to reduce tax evasion.

Although they are both similar in business structure, a personal service company is defined as a limited company that is owned and operated by a single person. However, a managed service company may have several owners, directors, and shareholders.

In the case of a PSC, the owner is usually the sole director and shareholder of the company. In MSC’s, there are multiple workers who are appointed directors and shareholders. Essentially, the MSC controls the business, not the contractor.

In both business structures, the shareholders or directors are also the employees carrying out the work.

Managed service companies and tax

To work within an MSC, your company must pass IR35 tests to ensure that you are paying the correct amount of income tax and national insurance payments.

In 2007, HMRC introduced a new law for managed service companies to comply with tax laws, as some MSC's were avoiding taxes through the company.

If you are a contractor using an MSC, you are still required to pay the correct amount of income tax and national insurance payments as if you were an employee.

If HMRC catches you using an MSC to avoid tax, then you will be liable for backdated payments, as well as a fine. Therefore, if you appoint contractors as directors or shareholders, it is expected that they pay the correct tax as normal employees.

How do I set up a managed service company?

A managed service company is a form of limited company. You would set it up the same as you would a limited company in the UK.

You will need to choose a business name, keeping in mind that “limited” will be at the end of the name. You will also need to decide who the shareholders will be, which is normally the workers in the case of an MSC.

Once you have your documents prepared, you can apply through the UK Government Website. It takes 24 hours, costs £12 to apply, and you will be registered for corporation tax at the same time.

I would suggest contacting HMRC regarding the IR35 regulations to ensure that your company is complying with the laws and paying the correct amount of income tax and national insurance payments.

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