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HMRC internal manual

Employment Status Manual

HM Revenue & Customs
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Managed Service Companies (MSC): Meaning of a MSC

For a company to be a MSC it must fulfil all four conditions of Section 61B (1), Chapter 9, Part 2 ITEPA.

First condition

The company’s business must consist wholly or mainly of providing, directly or indirectly, services of an individual to third party clients.

Second condition

The individual (worker) supplying their services to the third party client receives payments (or an aggregate of payments and benefits) from the service company equal to the greater part of the sums received by the service company from the client for the services provided by the worker.

The time period for comparison is triggered when a payment is made from the company to the worker, or associate. This time period links with the charging provision, which is given effect when a payment is made.

The intention of the legislation is to compare on a cumulative basis rather than any particular timeframe.


First payment: assume the company receives a payment for the services of the worker of £500 and pays £300 to the worker or associate. The worker has received an amount equal to the greater part of the amount received for the services.

Second payment: assume an amount of £250 is paid to the worker or associate, which is derived from a receipt by the MSC of £400. The comparison is now £900 against £550, and again the worker has received an amount equal to the greater part of the total amount received for the services.

This comparison will continue as each subsequent payment is made.

Third condition

The payments received by the worker are greater than they would have received if all of the payments were treated as employment income of the worker relating to an employment with the service company.

The comparison is performed each time a payment to the worker (or an associate) is made. It is not an annual comparison. The charging provision of the legislation is triggered when a payment is made to the worker or associate; however the legislation will only apply if the company has met the definition of a MSC. It follows, therefore, that the comparison (or test of does the company meet the definition of a MSC) must be performed when the payment is made.

The comparison is between the actual payments received by a worker and the amounts that would have been received if every payment in respect of their services were employment income. The comparison allows for the deduction of expenses which are allowable under the Taxes Acts.

It is the intention of the legislation that the third condition should be considered on the basis that the company through which the worker is operating treats the payments as employment income and applies PAYE accordingly, and the comparison is performed on that basis.

In umbrella companies, workers are treated as employees of the umbrella company and all payments to workers as employment income which is paid in the form of salary and allowable expenses. It follows therefore that what the worker has received from the umbrella company is the same as they would have received from any other company through which the worker operated and which treated all payments as employment income. Consequently the third condition is not met and the umbrella company does not meet the definition of a MSC.


Miss B provides her services through a service company XYZ Ltd. In the first week of the 2007 to 2008 Tax Year Miss B receives a payment of £575 from XYZ Ltd. The payment has not been subject to Income Tax or NICs, therefore the amount received by Miss B is the same as that paid by XYZ Ltd, which is £575.

The third condition of Section 61B (1) requires a comparison to be made on the amount actually received by Miss B, £575, and the amount she would have received if the sum paid by XYZ Ltd had been treated as employment income and subject to PAYE accordingly.

Taking account of Miss B’s personal allowances, the amount of Income Tax due from XYZ Ltd on a payment of £575 employment income to Miss B is £99.31. By treating the payment as employment income, Miss B would therefore have received £575 less £99.31, which is a net sum of £475.69.

The comparison has established that Miss B received from XYZ Ltd a greater payment (£575) than she would have done had the amount had been treated as employment income (£475.69). The third condition has therefore been met.

Note: Subsequent to 6 August 2007, the comparison will also need to take account of the deduction arising for employees Class 1 NICs.

Fourth condition

For this condition to be met, there must be person termed a “MSC Provider”, and that person must be involved with the company.

ESM3515 provides guidance about MSC Providers. ESM3520 provides guidance about MSC Providers involved with companies.