Managed Service Companies (Spotlight 67)
Find out about Managed Service Companies and Managed Service Company Providers, including how to identify them and their role in tax avoidance schemes.
This spotlight contains information for individuals, including agency workers providing or thinking about providing their services through a personal service company or partnership.
‘Spotlights’ warn you about certain tax avoidance schemes which you should be aware of.
Managed Service Companies and what they do
A Managed Service Company is a type of structure that provides the services of an individual, or individuals, to others (clients). Managed Service Companies may be structured as personal service companies, partnerships, or composite companies (multiple worker-shareholders).
Managed Service Company schemes are mass-marketed, typically sold ‘off-the shelf’. To be a Managed Service Company, a business defined as a Managed Service Company Provider needs to be ‘involved’ with how the service company itself operates.
Managed Service Company Providers are businesses that, although they generally offer accounting services, are in the business of promoting or facilitating the use of limited companies, or partnerships, for individuals to provide their services through. This is usually done by promising the individuals an increase in take home pay if they use this model through their service.
Managed Service Company Providers design and sell schemes that enable individuals to work through intermediary companies to end clients. The significant factor being the use of the intermediary company to lower the overall tax the worker pays. Managed Service Company schemes encourage and enable disguised employment.
Why we have the Managed Service Company rules
The Managed Service Company rules ensure a level playing field between users of these schemes compared with workers and businesses who already pay the right levels of:
- Income Tax
- National Insurance contributions
The rules test whether there is involvement from a Managed Service Company Provider in the Managed Service Company. Where the rules apply all payments received by the worker should be subject to PAYE.
The application of the law means the Exchequer receives the correct money, ensuring the:
- tax gap does not grow
- funds available for public services are not reduced
Taxation of companies and employees
There is a difference between how companies and employees are taxed. Companies pay Corporation Tax on profits, and its shareholders pay tax on dividends. The tax paid by companies and shareholders is normally lower than the amount of Income Tax and National Insurance contributions paid by employees and their employer.
The government introduced the Managed Service Companies legislation to tackle advantages gained through schemes designed to avoid tax by working through a limited company. The rules make sure the correct taxes are paid.
Components of Managed Service Company schemes
For a company to be a Managed Service Company, 4 conditions must be met.
These conditions are as follows:
- the intermediary company provides the worker’s services to an end client
- the worker receives at least 50% of the money that was received by the intermediary company in exchange for the services of the worker to the end client
- the payments received by the worker are more than they would have received if all the payments were treated as employment income
- a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals is involved with the company
The fourth condition refers to a Managed Service Company Provider needing to be involved with the company. This is determined by 5 tests that examine the relationship between the Managed Service Company Provider and the company. If one of those tests is met, a Managed Service Company Provider is involved with the company.
Managed Service Company Providers and their role in the legislation
A Managed Service Company Provider is classed as ‘involved with the company’ if they do any one of the following:
- 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 payments to the individual (or associates of the individual) are made
- influence or control the company’s finances or any of its activities
- give or promote an undertaking to make good any tax loss
There are 5 involvement activities and what follows is an example of each (non-exhaustive). For more detailed information you can read the relevant sections of the Employment Status Manual (ESM3500).
Managed Service Company Providers — information and examples of involvement
Benefitting financially on an ongoing basis from the provision of the services of the individual
The Managed Service Company Provider charges regular (variable) fees for their service, typically through a portal or app, which increase and decrease depending on when the worker is providing their services.
Influencing or controlling the provision of the services
The Managed Service Company Provider may construct the contracts through which the worker will be providing their services. The Managed Service Company Provider might determine or affect what is included in the terms and conditions of the service contracts between the intermediary and the client.
Influencing or controlling the way payments to an individual (or associates of the individual) are made
Managed Service Company Provider products may be programmed to suggest how the company distributes profits.
This will typically be the signposting for, or a presumption of a low-salary high-dividend formula. In other words, where most of a worker’s income is from dividends rather than a salary from the intermediary company. The signposting for, or presumption of, payments being made in this way will influence or control how the intermediary company pays the worker.
Influencing or controlling the company’s finances or activities
Managed Service Company Providers could affect the financial administration and functions of the company, such as advocating what banking organisation or account facility the intermediary should use.
Giving or promoting an undertaking to make good any tax loss
The Managed Service Company Provider could offer or promote insurance for companies covering liabilities arising from:
- the Managed Service Company rules
- other provisions of the Tax Acts or National Insurance legislation
Identifying a Managed Service Company product
Common signs of Managed Service Company products are as follows:
- advertisements from a business, for example, internet ‘pop-ups’, promising to maximise your take home pay
- encouragement or push for you to work using a company and become a shareholder, taking a small salary and receiving the rest in dividends (this will often be prominent in the marketing technique or sales literature of Managed Service Company Provider businesses)
- product standardisation — Managed Service Company schemes are mass sold ’off-the-shelf’ software products — they are not, by default, tailored according to your own circumstances
- a variable product fee that goes up when you are working and down when you are not
- software that determines the most tax advantageous result — Managed Service Company products are not the same as accounting software programs, designed and sold to specifically assist people with their bookkeeping needs
An example of a Managed Service Company Provider interaction with an individual
In the following example, we refer to Katie. Katie is a courier driver. While browsing the internet Katie discovers an advertisement from ‘Company-U-Like’, a business which promises workers that they will:
- maximise their take home pay in exchange for a few button clicks
- enable workers to be their own boss, working for themselves
Company-U-Like promise that by using their ‘special online portal’ Katie can bypass the ‘boring corporate stuff’ for a ‘small monthly fee’.
Katie contacts Company-U-Like who demonstrate how their software product called ‘Go-Beyond’ can:
- help run Katie’s company’s affairs
- lower Katie’s tax liability
Katie is told to register a company from which services can be provided. Katie can then start to receive dividends. Katie is shown how the software will provide the most tax-efficient result once the company is live and providing services.
Katie registers a company ‘KT1 ABC Ltd’, then signs up to the ‘Go-Beyond’ online portal for which Katie pays a variable fee that reduces when Katie is not working.
The Managed Service Company rules will apply to KT1 ABC Ltd, and the payments it makes to Katie should be treated as employment income.
Things to remember
The Managed Service Companies legislation is designed to tackle specific arrangements that artificially lower a person’s Income Tax and National Insurance contributions payments. However, the application of the rules is not restricted to just one form of intermediary.
Multiple worker-shareholder companies, known as composite companies, managed personal service companies and partnerships can all be used as the intermediary in Managed Service Company schemes.
As mentioned earlier in this Spotlight, there are several criteria that need to be met before the rules apply. The rules apply to the marketing or facilitation of specific corporate arrangements by Managed Service Company Provider businesses. Individuals and businesses using traditional bespoke tax advisory or accountancy services only, for example, the provision of dedicated bookkeeping software are not within the scope of the Managed Service Companies legislation.
A traditional accountant will:
- review your circumstances and working practices
- present you with appropriate compliant options
A Managed Service Company Provider on the other hand specifically promotes or facilitates the use of one corporate structure to all its customers.
The driver behind Managed Service Company Provider businesses is to encourage and enable you to work through a corporate structure to gain access to lower taxes.
Additional help from HMRC
Detailed Managed Service Company guidance is available in the Employment Status Manual (ESM3500), starting at ’Managed Service Companies’.
Spotlight 32 provides further information on the application of the law from the Managed Service Companies court case of Christianuyi Limited and Others.
If you have concerns about arrangements, consider:
- reading the Introduction to tax avoidance
- the available advice on how to make a voluntary disclosure to HMRC if you need to make a voluntary disclosure regarding Managed Service Company arrangements