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What is a managed service company provider?

Author: David Kirk

Published: 01 Nov 2024

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In the second of two articles on the managed service company rules, David Kirk draws on recent experiences of dealing with HMRC to look at the circumstances in which an accountant could be considered an MSC provider.

Author’s note: In these articles I am attempting to explain what I believe is HMRC’s position. Many of the views given here are not my own: indeed I am in the process of challenging a good many of them. It will however be some time before the tax tribunal and the courts come up with the final word on this.

HMRC was approached in advance of publication and gave the following comment: “We appreciate there’s a real person behind every bill and we recognise dealing with large tax bills comes with significant pressure. Our message to anyone worried about a tax liability is to contact us as soon as possible to talk about options. The managed service company rules exist to help ensure people who work like employees pay tax like employees.”


HMRC has challenged how the managed service company (MSC) rules apply to the clients of two firms of accountants. The way in which HMRC appears to be interpreting the rules has caused some anxiety as – quite rightly – firms are nervous of overstepping a boundary given the potential consequences for them and their clients. 

In my other article, I set out the conditions which must be met for a company to be an MSC. The key condition for being an MSC, and the one that ought to be of most interest to chartered accountants, is that an MSC provider is involved with the company (s61B(1)(d), ITEPA 2003). This is because if a firm of accountants is found to be an MSC provider, HMRC can use the transfer of debt provisions to transfer the MSC’s debts to the MSC provider and its directors personally. 

This is a two-limb test. Both ‘MSC provider’ and ‘involved with the company’ have legally defined meanings and both these limbs must be considered. 

In this article I look at each limb of the test, using examples to illustrate how they could apply in the context of an accountancy business. Some of the examples are based on examples I have seen in recent HMRC correspondence. As noted above, HMRC’s view may be challenged; however, it is important that accountants are aware of HMRC’s view when considering whether the MSC rules apply to their clients.

What is an MSC provider?

An MSC provider is a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.

There is an exclusion for providing legal or accountancy services in a professional capacity (s61B(3), ITEPA 2003). Two key questions likely to be relevant for accountants to assess the risk of failing the first part of the test are:

  • Does the accountant promote or facilitate the use of companies that provide the services of individuals? ‘Facilitate’ means ‘makes easier’, which most accountants do. You could say it is what an accountant is paid to do, so an accountant probably does do this. If it is a contractor specialist, dealing only or mainly with personal service companies (PSC), then it may well promote them as well. Either ‘promoting’ or ‘facilitating’ will pass this part of the test – it does not have to do both.
  • Does a discernible part of their business specifically market and/or provide corporate solutions and services to individuals providing their services to end clients? If the business (or a discernible part of the business) is basically to provide corporate solutions to contractors, then HMRC would consider that this overall ‘corporate solution’ goes further than the mere provision of accountancy services and so the accountant would not be exempt from being an MSC provider under s61B(3), ITEPA 2003. If this offering is a discernible part of the business, then it would be an MSC provider for that discernible part of the business.

An MSC provider is a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals

Example 1: standard solution provider

Directshun Limited calls itself ‘accountants’ and its clients are all PSCs. Although it does not say so, it does not offer any services to people who do not wish to incorporate or to larger businesses (it has a sister company that does and its staff will willingly pass a client over to them where they think it appropriate). 

It explains the differences between salaries and dividends and sends out a standard letter to all clients each year giving suggestions as to what salary they should withdraw. Its website advertises that “We deliver an all-inclusive service for contractors, including keeping your accounts; when it comes to making decisions about how to take your money out of the company, we advise you how to do this keeping your tax bill to a minimum.” 

Directshun Limited is an MSC provider. It is providing standard solutions for everybody, and although it says it “advises” on salaries this advice is generic and so there is no realistic alternative to paying the salaries that it advises.

Example 2: full accountancy service

Alcemissed & Partners offers accounting services to a broad range of clients, although in practice the majority of them are PSCs. These include bookkeeping, payroll, production of accounts, filing tax returns for both the companies and their directors, and tax advice for both companies and their directors. 

Each corporate client is offered an annual review, usually done over the telephone or videolink, shortly before the start of the tax year, to decide on what salary is best for the directors to extract and how the client can best determine what dividends to withdraw. Clients can opt in and out of individual services, but payroll services are not offered on their own.

Alchemissed & Partners is not an MSC provider. Although it facilitates the use of companies that provide the services of individuals, all the services that it offers are accountancy services, it does not offer them solely to PSCs and there is no standard generic advice given.

Involved with the company

Is the accountant ‘involved with’ the MSC? This test only needs to be considered if the accountant is:

  • an MSC provider; and 
  • the company fulfils all of the other conditions (these were covered in my previous article last month). 

As explained above, ‘involved with’ has a legal definition (s61B(2), ITEPA 2003) and an accountant will be ‘involved with’ the company if it (or its associate) does any one of the following five things:

  1. benefits financially on an ongoing basis from the provision of the services of the individual;
  2. influences or controls the provision of those services;
  3. influences or controls the way in which payments to the individual (or associates of the individual) are made;
  4. influences or controls the company’s finances or any of its activities; or
  5. gives or promotes an undertaking to make good any tax loss.

Benefits financially on an ongoing basis from the provision of the services of the individual

If an accountant takes a percentage of the fees charged by the individual, then they will benefit financially on an ongoing basis from the provision of the individual’s services. 

However, HMRC also considers that charging fees based on the number of invoices raised/payroll runs is indirectly linked to the provision of the services of the worker on an ongoing basis and could be an indicator of services that would constitute being ‘involved with’ in all circumstances.

Example 3: indirect benefit

Devon and Co charges £112 a month for its all-inclusive standardised service to Albirt Limited. The service includes VAT returns (done once a quarter) and annual accounts and tax. The fee is levied during the year to which it relates, so that annual accounts – which are done several months after the year end – are in effect paid for in advance.

Devon and Co is involved with its clients. The provision of the services is what leads to Albirt Limited’s clients to pay for them; this payment in turn enables Albirt Limited to pay Devon and Co. Devon and Co therefore benefits indirectly from the provision of the services.

Example 4: no benefit

Gnawfolk Accounting agrees with Sertees Ltd charges of £75 a VAT return, £900 for the company’s annual accounts and corporation tax, and £18 for each individual every time that the payroll is run. These fees are charged in arrears once the work is done and paid by direct debit.

Gnawfolk Accounting does not benefit financially on an ongoing basis from the provision of Sertees Ltd’s services. Although it receives money very often, it is not an ongoing basis. Each transaction is a one-off and can be viewed in isolation from the others.

The above example is based on my understanding of the rules. It is possible that HMRC may disagree, and attention should be paid to HMRC’s guidance at ESM 3520. Assuming that my understanding is correct, examples 3 and 4 highlight the importance that billing arrangements may have in determining if a firm is a MSC provider. 

The accountant influences or controls the provision of the individual’s services

This provision is aimed at engagement contracts dictating or determining the terms under which services are provided or are to be remunerated. It is very unlikely that an accountant will do this, although others involved in establishing the contracts might meet this condition.

The accountant influences or controls the way in which payments are made to the individual or their associates 

HMRC considers this is essentially a ‘standard product’ test that indicates that a ‘product’ or ‘model’ has been sold where a number of companies are doing the same things to achieve the same objective (such as to minimise the tax paid).

Example 5: influence on salary

Ragthyme & Co provides the individual with a yearly statement showing them how much they are going to receive, divided between salary and dividends. The salary is £9,100, which (currently) happens to be the same as the point at which employer’s NIC start to become payable, and the dividends are based on last year’s profits being paid to the individual in full. 

Although the individual can say that they would like to have a different salary, they are not encouraged actively to engage with Ragthyme & Co on this and no explanation is given as to why this salary is recommended for them personally.

Ragthyme & Co is involved with its clients. Although there is some latitude over dividends, it influences the way in which the salary is calculated. The £9,100 figure will minimise the tax paid for most clients, and it is reasonable to assume – both from this figure and from the fact that there is no individual discussion about it – that this has been recommended to all clients, and so is a standard model.

The accountant influences or controls the company’s finances or any of its activities 

A company’s officers should determine how the company, as a separate legal entity, and its finances are administered independently of any external influence. While HMRC accepts that in this context ‘influences’ does not mean the provision of advice, it will look at the wider context in which that advice is delivered to determine whether it is in fact a standard solution. 

It is understood that HMRC considers that an accountant would influence or control the company’s finances if the company is unable to operate without the use of an online portal provided by the accountant.

In this context ‘influences’ does not mean the provision of advice; HMRC will look at the wider context in which that advice is delivered

Example 6: advice via portal

Rielee’s Accountants provides a portal for Mr Modi’s company Moedee Limited to upload business information such as expense receipts and invoices and which links directly to the company’s bank account. The accounts analysis then shows the state of play for the business and the company can view levels of profit and how much dividend is available to be drawn down. Mr Modi does not pay himself without checking the portal first. He also cannot alter his salary without first speaking to Rielee’s Accountants.

Rielee’s Accountants is involved with Moedee Limited. The company has no independence from the portal and Rielee’s Accountants, so Mr Modi is not discharging his duties as a director without external influence.

It is worth noting that there are standard software products and apps on the market that can effectively provide these services. It is not clear how HMRC views the evolution of these products in the context of this legislation or how HMRC views accountants that encourage their clients to use these products.

The accountant gives or promotes an undertaking to make good any tax loss

This test is aimed at insurance products that accountants sometimes sell.

Example 7: promotion

Oxford Figurework Limited sells an insurance product to its clients called ‘IR35 No Worries’, which guarantees to pay out tax investigation fees and any extra tax payable if the client companies are found to be within IR35. Ranjit Tek Limited does not take this up.

Oxford Figurework is involved with Ranjit Tek Limited. It has promoted the ‘IR35 No Worries’ product to Ranjit; whether or not Ranjit Tek Limited takes it up is not a part of this test.

Example 8: non-promotion

Shurebooks Limited sells an insurance product called ‘Tax Protection,’ which guarantees to pay tax investigation fees if client companies are investigated by HMRC. Solomon Compute Limited pays £20 a month for this, and Shurebooks Limited gets a £4 commission from the insurance company behind the product.

Shurebooks Limited is not giving or promoting an undertaking to make good a tax loss. Although the product pays the investigation fees, it does not pay the actual tax.

David Kirk, Director, David Kirk & Co Ltd.

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