New HMRC guidance highlights the risks of Managed Service Companies

HMRC have recently published new ‘Spotlight’ guidance on GOV.UK, warning about the Managed Service Company (MSC) tax rules.

The MSC rules are intended to prevent a worker from paying less tax by providing their services through a limited company, where that company has been set up and is run for them, by someone else.

What is a MSC?

Generally speaking, providing services through your own limited company can help you save tax as compared to just being an employee, through being able to do things like pay yourself in dividends. We explain more in our guidance, although the tax savings are not as large as they used to be due to changes in the tax system.

However, there was a period when it was quite common for some agencies and umbrella companies to encourage workers to set up their own limited companies, or even to set them up on the worker’s behalf, to access the tax savings. In some cases, the limited companies were not being genuinely run and managed by the workers and so could be seen as merely a means to pay less tax. This sort of company is known as a MSC, and there are special tax rules that apply.

What are the risks of a MSC?

If you work through a company that is found to be a MSC, the rules say that you can’t take advantage of the tax savings that working through your own limited company often offers.

The MSC tax rules say that the company must deduct income tax and National Insurance contributions under PAYE from all income you earn though the company – even if the payment is badged as being a dividend. This reverses any potential tax saving that might have been achieved by you, as the worker.

  Debt transfer provisions within the rules mean that if HMRC consider that an amount of income tax and National Insurance under PAYE is due, they can recover it from you, the worker. This could happen if the MSC has not paid what it owes to HMRC, for example, because it has closed down. Note that HMRC can recover the tax from a worker even if the worker didn’t fully understand or know about all arrangements in the background.  

HMRC’s recent Spotlight guidance

Although we have provided a simple overview above, the MSC rules are very complex. HMRC’s new Spotlight sets out further detail on how you can tell if your limited company is a MSC. It also gives examples of the types of things that might mean your limited company is ‘managed’ by someone else. This might include things like:

• Where the amount that you are paid by way of a dividend is determined for you.
• The associated administration of running the company is all done for you.

Although HMRC are actively investigating some situations where they think limited companies are MSCs, until now there has been very little guidance designed for workers. If you are an agency or umbrella worker and operate through a limited company, it is important to read HMRC’s Spotlight guidance in full and understand if you think you might fall within the MSC rules.

Some other information is set out in a previous HMRC Spotlight on GOV.UK.

A note on IR35 and off-payroll

It is important to understand that the MSC rules are different to the IR35/off-payroll rules that can also apply to limited companies. Indeed, even if you are outside IR35/off-payroll, you can fall within the MSC rules. We look at the relationship between IR35/off-payroll and MSCs in more detail in our guidance.

How to get help

If you are concerned that your limited company might fall within the MSC rules then we would recommend you take professional advice. There are some tax and legal consulting firms with specialist MSC knowledge who might be able to help you. You can find further information about getting professional advice on our Getting Help page.

If you are on a low income, are in financial difficulty, or believe that you are in a vulnerable position and cannot afford to engage a paid advisor you might qualify for help from TaxAid.