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Managed Service Companies – Are You Aware of the Risks?

Managed Service Companies – Are You Aware of the Risks?

by on September 7, 2022

There are now around 4.25 million self-employed people in the UK (Statista, June 2020) many of whom provide their services to clients through a Managed Service Company (MSC). However, after a 2019 civil case in the Court of Appeal (Christianuyi Limited & Others v HM Revenue & Customs), which questioned the definition of ‘involvement’, payme examines whether MSCs are a risk worth taking.


Managed Service Company legislation, which was updated on 25 February 2020 (Statista), questioned whether share dividends paid to an MSC were subject to PAYE Income Tax and National Insurance Contributions (NICs), and clarified the status of MSCs. 

MSCs, as defined by HMRC, promote or facilitate the use of companies to engage the services of individuals and are a popular method for contractors to recoup the tax benefits of working through a limited company as shareholders, without having overall responsibility of owing and running that company. HMRC also define MSCs as being ‘involved’ in the provision of services and benefit financially from that involvement – this can mean that they influence or control either the services or the way in which payment is made for them. This last point is particularly important because it implies that the contractor does not have control of their own business and, therefore, does not have full responsibility for it. 

In December 2006 HMRC announced that it was removing the tax advantage, and that it would take steps to recover any outstanding PAYE and NIC debts, arguing that some MSC schemes were being used to avoid paying the same levels of tax and NIC as people in traditional employment. And in April 2007 HMRC designated that all payments to individuals who provided their services through MSCs be subject to PAYE. 

Christianuyi Limited & Others v HM Revenue & Customs

This particular case involved five appellants who, HMRC claimed, tried to avoid paying PAYE Income Tax and Class 1 National Insurance Contributions on the income from their employment. The five were provided with PSCs by a company called Costelloe Business Services Ltd (CBS). HMRC argued that CBS was an MSC Provider because it was ‘involved’ with the five’s PSCs (as well as others). CBS maintained it offered simply an accountancy and ancillary service.

It is interesting to examine the term ‘involvement’ in more detail. HMRC’s definition of ‘involvement’ comprises five elements:

  1. benefiting financially on an ongoing basis from the provision of the services of the individual who provides those services through an MSC
  2. influencing or controlling the provision of the services of the worker
  3. influencing or controlling the way in which payments to the worker or an associate are made
  4. influencing or controlling the company’s finances or any of its activities
  5. giving or promoting an undertaking to make good any tax loss

HMRC have published guidance here which they hope will clarify what ‘involvement’ means. The First Tier and subsequent appeal looked at whether CBS was ‘involved’ with any of the appellant’s companies. CBS maintained it was not but found to have been significantly involved, leaving the appellants liable for Tax and NI debts.

Learning Lessons

What can contractors and recruitment agents learn from this case? 

Firstly it highlights the importance of doing due diligence on the companies contractors and recruitment agents approach to handle their business affairs. Not all MSCs adhere strictly to the rules, and deviation from them could result in fines and repayment of considerable sums of money to HMRC in back paid Tax and NI contributions.

Secondly it demonstrates just how vital it is to fully understand what operating within an MSC really means – as ignorance of the law is no excuse in its (blind) eyes. If something seems too good to be true then it probably is.

Thirdly it emphasises how crucial it is to choose a payment provider that deals fairly and legally with the people it purports to represent, and how demonstrative compliance (i.e. FCSA accreditation) truly is. The appellants in this case were at best naïve and at worst greedy but in either case were swayed by promises of greater riches than they were entitled to and it should be a salutary lesson in common sense and citizenship not to avoid paying their fair contribution to society. 

The full judgment in the Christianuyi Limited & Others v HM Revenue & Customs case can be seen here.

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