Managed service company (MSC) - What is an MSC?

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

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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 MSCs, it was used to reduce the chance of tax liabilities of shareholders and directors.

Although MSCs aren’t 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 MSCs and PSCs are types of limited companies that were introduced due to the IR35 legislation to reduce tax evasion.

Although they’re both similar in structure, a personal service company is defined as a limited company that’s 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’re paying the correct amount of income tax and national insurance.

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

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

If HMRC catches you using an MSC to avoid tax, then you’ll be liable for backdated payments, as well as a fine. Therefore, if you appoint contractors as directors or shareholders, it’s 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’ll need to choose a business name, keeping in mind that “limited” will be at the end of the name. You’ll 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’ll be registered for corporation tax at the same time.

It would be beneficial to contact 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.