Categorized | contractor faqs, PAYE

I’m a contractor, not a managed service company…right?

I’m a contractor, not a managed service company…right?

Probably. The rather circular definition of a Managed Service Company is one that is provided by a Managed Service Provider. Since these were effectively outlawed in 2007, it is important to understand how they are defined.

MSCs were a way to operate an independent business with minimal involvement in its day-to-day running. The provider would set up a composite company in which you would have a shareholding usually in the form of a unique class of shares in your name. You would be paid in direct proportion to the work you did and hence the income you generated. The provider would handle all the billing, payment and taxation activities on your behalf.

However, HMRC decided, with what some might say was justification, that operating in such a way was more to do with saving tax and NICs than it was to do with running a business. They closed down MSCs by ensuring that they only paid their workers through conventional PAYE/NIC, not through dividends: in effect they became more akin to umbrella companies.

The difference between using an MSC and using an accountant to manage your affairs is therefore important. A Contractor Accountant is in fact defined specifically in the rules. They cannot be an MSC Provider as long as they do not do any of the following activities:

  • benefit financially on an ongoing basis from the provision of the services of the individual,
  • influence or control the provision of those services,
  • influence or control the way in which payments to the individual (or associates of the individual) are made,
  • influence or control the company’s finances or any of its activities, or
  • give or promote an undertaking to make good any tax loss.

So as long as you are the one whose name is on the chequebook and decide what cheques to sign, you cannot be an MSC.

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Image: Split Personality by Shaun Allen

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