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HMRC internal manual

Employment Status Manual

Managed Service Companies (MSC): Worker treated as receiving Earnings from Employment

When a company meets the definition of a MSC and where the following applies:

  • the services of a worker are provided by a MSC; and
  • on, or after, 6 April 2007 the worker, or an associate of the worker, receives from any person a payment or benefit which can reasonably be taken to be in respect of the services; and
  • the payment or benefit is not earnings received by the worker directly from the MSC

then the MSC is treated as making to the worker a payment of employment income and earnings in respect of an employed earner’s employment.

What this means in practice is that any payment or benefit received by the worker, not already subject to PAYE, Tax, and Class 1 NICs, is liable both to Tax and (from 6 August 2007) Class 1 NICs. For NICs purposes, the MSC is treated as the secondary contributor.

It should be noted that the legislation applies irrespective of:

  • the nature of the “payment or benefit” (see below);
  • whether the payment or benefit is received by the worker or an associate (see ESM3525); and
  • whether or not the payment or benefit is made by the MSC.

Payment or benefit

A ‘payment or benefit’ means anything that, if received by an employee for performing the duties of an employment, would be general earnings from the employment.

When a payment or benefit is treated as received

A payment or benefit is treated as received:

  • In the case of a payment or cash benefit, when payment is made of the total amount or on account of the total amount;
  • In the case of a non-cash benefit, it will be treated as if the worker had been an employee of the MSC and the benefit had been provided by reason of employment.

The date of receipt of the payment or benefit will either be the actual time the benefit is provided, or the tax year during which it was received, in accordance with Sections 19 and 32 of Chapters 4 and 5 Income Tax (Earnings and Pensions) Act 2003.

Deemed employment payment/attributable earnings

The sum treated as earnings from an employment is termed the “deemed employment payment”. The same sum for NICs purposes is termed the “attributable earnings”. ESM3535 provides guidance on how to calculate the “deemed employment payment”— that is the amount on which PAYE and NICs is due.


Mr C is an engineer who provides services to a client through his MSC, C Ltd. C Ltd have an on-going contract with an end client to provide the services of Mr C.

Subsequent to 6 April 2007, Mr C receives a payment of £1,000 from C Ltd. The payment has not been treated as earnings from employment of Mr C. (N.B. irrespective of how the payment is termed: fee, loan, advance, etc. it must still be considered as employment income.) This has the following consequences:

  • C Ltd is treated as making to Mr C a payment which is to be treated as earnings from an employment
  • Mr C is treated as receiving a deemed employment payment based upon the amount of £1,000
  • The deemed employment payment is taxable as employment income. If the payment is made after 6 August 2007 the deemed payment will also be subject to Class 1 NICs as earnings in an employed earner’s employment
  • The deemed employment payment is treated as made at the same time as the payment of £1,000 is received by Mr C.