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In the UK, a form of company organisation has evolved called a Managed Service Company (MSC). Mostly, born from the IR35 legisaltion in 1999 which came into force in 2000, this form of corporate structure positions workers and contractors normally into a group of between 5 and 8 people as shareholders in a corporation owned and run by the service supplier. Occasionally the workers will be appointed as Directors but always shareholders. As shareholders they can then receive minimum salary payments and the balance of income as dividends. Usually the service supplier would perform company secretatial duties and offer basic tax revenue advice.

These forms became popular where freelance contractors are used as a way of gaining high net returns (circa 85%+) compayed to PAYE (Pay As You Earn) with little corporate responsibilities. In return the providers charge a fee for having the service. To work inside this form workers must commonly pass IR35 Tax tests to ensure they’re able to accept dividend payments.

In 2006 the UK Treasury/HMRC introduced draft legislation “Tackling Managed Service Legislation” which attempts to address the use of “composite” structures to avoid Income Tax and National Insurance on forms of trading that the Treasury deem as being akin to “employed”. After a period of time of consultation and re-draft, the new legislation became law April 2007 with extra aspects coming into force in August 07 and fully January 2008. A PAYE Umbrella company is effectively exempted from the legislation, which also seeks to pass the potential burden of unpaid debt (should a provider “collapse” a structure) to concerned parties e.g. A recruitment representation that has been deemed to encourage or help the scheme.

A number of MSC suppliers have since withdrawn from the market and have either became to PAYE operations or sought to get seens as true Accountants rather than scheme promoters.

Managed Service Companies (MSC) differ to Personal Service Companes (PSC) as it’s the MSC that manages and checks the affairs of the business, not the contractor. Contractor’s Handbook

The 2007 Budget legislated against MSCs by removing the associated tax rewards for contractors working through them. Prior to the government’s action, there were several varieties of a Managed Service Company.

One of the primary forms was Composite Companies, where typically up to 20 contractors became non director shareholders. The contractors received a low salary and disbursements with the remainder payable as a dividend. This method of earnings provided many financial profits, since it avoided the payment of national insurance and income tax that would otherwise be payable if the contractor was paid entirely under PAYE (salary).

HMRC grew increasingly frustrated with the use of MSCs which, when investigated, were able to liquidate (as they had no assets) and start trading under a new company the next day. Following the MSC legislation, it is now the responsibility of a MSC provider to correctly operate PAYE and deduct the necessary tax and NI on all income payable to a contractor.

To reinforce this law, the government have allowed the recovery of any underpaid taxes from appropriate third parties; mainly those behind the MSC as well as connected or controlling parties.

Some companies still offer versions on these schemes so it can be confusing to a contractor to know what is legal and what is not. The simplest way to operate compliantly is if you decide to work via your own PSC then you must run it yourself, don’t delegate check or key determinations to a third party provider

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