Managed Service Company (MSC) rules – a contractor’s guide

The Managed Service Company (MSC) legislation is one of the most complex and punitive regimes in UK contractor taxation, reclassifying company income as employment earnings if a provider is deemed to control or influence how a business operates.

First introduced in 2007, it was designed to close down composite company arrangements.

For many years, it sat quietly in the background, but recent enforcement activity, tribunal cases, and HMRC Spotlight 67 mean contractors and their advisers must now take it very seriously.

This guide explains the MSC rules, what counts as an MSC provider, the history of enforcement, key case law, and what to do if you receive an enquiry.

What is the Managed Service Company legislation?

The MSC legislation was introduced via Chapter 9, Part 2 ITEPA 2003 and took effect from 6 April 2007.

It targeted composite company arrangements, where scheme providers set up and managed limited companies on behalf of groups of contractors.

Workers enjoyed the tax advantages of working through a limited company, without the responsibilities that come with running one.

From April 2007, all income received by companies deemed to be Managed Service Companies became subject to PAYE income tax and National Insurance.

Transfer of debt provisions were also added, allowing HMRC to pursue unpaid liabilities from directors, the MSC provider, or other associated parties.

Although distinct from IR35, the result of being caught is similar: your company’s income is treated as employment income, subject to PAYE and NICs.

HMRC’s Employment Status Manual contains the full section on MSCs: see ESM3500 onwards.

Background and history

To understand why the rules were introduced, it helps to look back:

• 1990s: composite companies became common. Ten or twenty contractors might work via a single company, which a provider administers. In some cases, the provider controlled bank accounts and paid contractors through low salaries and high dividends.
• 2000: The IR35 rules were introduced to tackle disguised employment, but composites largely continued.
• 2007: Chapter 9 ITEPA came into effect. Composite companies collapsed almost overnight.
• 2007–2018: The rules received little enforcement activity. Contractors and accountants paid more attention to IR35.
• 2019: HMRC won the Christianuyi & Others v HMRC case against Costelloe Business Services, re-establishing the reach of the legislation.
• 2022–2025: HMRC issued thousands of notices to contractors and began investigating mainstream accountancy firms, surprising the sector. In 2024, it published Spotlight 67, signalling a renewed focus on MSC activity.

You can read the original Hansard debate on MSC legislation for policy background.

What is an MSC provider?

An MSC Provider is a business or individual who promotes or facilitates the use of personal service companies. For a company to be classed as an MSC, four statutory conditions must be satisfied (ESM3510):

1. The company’s business primarily consists of providing individual services to clients.
2. The worker receives most of the company’s income in return for their services.
3. The payments are higher than they would have been if taxed as regular income from employment.
4. An MSC Provider is “involved” with the company.

HMRC describes “involvement” in ESM3520.

Examples include influencing how services are delivered, controlling finances, or instructing directors on how to allocate income.

Normal accountants and solicitors acting in a regulated professional capacity are not considered MSC Providers (ESM3515).

Involved vs not involved

Involved (MSCP)	Not involved (accountant)
Controls or operates client bank accounts	Prepares annual accounts and tax returns
Tells directors exactly how to split salary/dividends	Explains tax options and leaves decision to director
Charges a % of turnover	Charges a fixed monthly fee
Markets “higher take-home pay” schemes	Provides regulated accountancy services

The Costelloe / Christianuyi case

The leading case is Christianuyi & Others v HMRC.

Contractors used their own personal service companies, which were formed and managed by Costelloe Business Services (CBS).

CBS set up companies, provided addresses and secretarial services, controlled bank accounts, deducted fees, and paid contractors via minimal salaries and dividends.

HMRC argued that CBS was an MSC Provider. The First Tier and Upper Tribunals agreed, and in 2019, the Court of Appeal upheld the ruling.

The contractors were left with around £160,000 of liabilities. The decision confirmed that significant control over finances and remuneration is enough to trigger the legislation.

• Court of Appeal judgement
• HMRC Spotlight 32

HMRC enforcement since 2007

For over a decade, the rules lay largely unused. That changed after the Costelloe ruling.

Subsequently, in 2022, thousands of contractors received Regulation 80 PAYE determinations and Section 8 NIC decisions covering 2017/18 to 2019/20.

HMRC is investigating several accountancy firms, alleging they acted as MSC Providers.

The demands caused alarm across the sector, with many questioning whether traditional contractor accountants could truly be considered MSC providers.

Spotlight 67 – HMRC’s latest warning

In November 2024, HMRC published Spotlight 67, updated in January 2025, setting out its concerns.

HMRC states that some accountancy firms cross the line into being MSC Providers, particularly when they promote tax-efficient income models.

Warning signs highlighted include:

• Marketing “higher take-home pay” through limited companies.
• Standardised low-salary/high-dividend templates within software.
• Software or portals that automatically calculate income splits without directors making the decision.

HMRC provided an example of “Katie” being told to set up a company and then using software to pay herself dividends for maximum tax efficiency. HMRC views this as provider “involvement”.

Professional bodies, including the ICAEW and CIOT, have expressed concern that HMRC’s interpretation could capture normal accountancy services.

The overlap with IR35 reforms is also notable: off-payroll rules already tax many contractors as employees, but MSC enforcement adds employer NIC liabilities on top of this.

Read employment specialist David Kirk’s take on Spotlight 67 here.

Churchill Knight and the MSC Support Platform

One of the most high-profile investigations involves Churchill Knight & Associates, a firm with over 25 years of contractor accountancy experience.

HMRC has labelled Churchill Knight an MSC Provider and issued notices to clients across several tax years. The firm strongly denies this and is defending its position with legal support.

To help contractors affected, Churchill Knight has launched the MSC Support Platform. This provides resources, FAQs, updates, and a private forum for impacted directors. Tom Edwards, Director at Churchill Knight, said:

“We believe that HMRC has entirely misinterpreted the MSC legislation, and we strongly deny being involved with our accountancy clients as a Managed Service Company Provider. Throughout this investigation, we’re offering around the clock support to our impacted clients.”

What to do if you receive a letter

If you receive a Regulation 80 or Section 8 notice, act immediately. We asked Qdos what contractors should do.

Initial steps

• Appeal the notice within 30 days because the taxes are estimated and excessive.
• Request the postponement of liabilities pending the appeal.
• Notify your accountant or tax adviser immediately.

Late appeals

You can submit a late appeal or postponement application, but HMRC may reject it. See ARTG2240 for more information.

Evidence

Provide evidence that the MSC legislation does not apply. For example, that all income is taken via PAYE, or dividend income is minimal.

Liability and transfer of debt

The MSC rules contain provisions for the transfer of debt (PAYE81695). If the MSC cannot pay, HMRC can transfer liabilities in order:

1. to the company’s directors or associates,
2. to the MSC Provider and its associates,
3. and further down the chain as prescribed in regulations.

For contractors, this means that closing a company does not protect you.

HMRC can pursue liabilities years later. Discovery rules allow HMRC to go back up to 20 years in cases of deliberate behaviour (SALF409).

How to protect yourself from MSC risk

Contractors can reduce their exposure by ensuring they are genuinely in control of their companies. Practical steps include:

• Use accountants who charge fixed fees, not percentages of turnover.
• Make your own decisions on salary and dividend levels. Accountants can advise, but the choice must be yours.
• Keep control of your company bank account. Never allow a third party to operate it on your behalf.
• Avoid firms that advertise “higher take-home pay guaranteed”.
• Ensure your accountant provides regulated accountancy services, rather than “packages” that promise outcomes.

FAQs

Are accountants exempt from the MSC rules?

Only where they provide legal or accountancy services in a professional capacity, and are not otherwise “involved” (ESM3515).

What is the link with IR35?

The MSC rules take precedence over Chapter 8 IR35, but Chapter 10 off-payroll rules override MSC legislation if applicable (ESM3525).

Can HMRC apply MSC rules retrospectively?

Yes. Using discovery powers, HMRC can go back up to 20 years in deliberate cases. The current investigations cover tax years from 2017/18 onwards.

What if I closed my company years ago?

Closure does not protect you. Transfer of debt rules mean HMRC can pursue directors personally for unpaid liabilities.

Are umbrella companies at risk?

No. The MSC rules apply to companies through which individuals provide services. Umbrella employees are taxed as PAYE workers, so MSC does not apply.

Does tax investigation insurance cover MSC enquiries?

Qdos confirmed: “Our TLC insurance policy covers the cost of representation in the event of an MSC enquiry. It does not, however, cover the cost of additional liabilities that may result from an enquiry.”

In conclusion

The MSC legislation was designed to eliminate composites in 2007, but it has returned to prominence through HMRC enforcement, high-profile cases, and Spotlight 67.

Contractors must ensure they control their companies and avoid arrangements where an accountant or provider could be classed as “involved”.

If you receive correspondence from HMRC, take expert advice immediately. The consequences of being deemed an MSC are severe: PAYE on all income, employer’s NIC, and the risk of debt being transferred to you or your accountant.

This article is provided for general information only. It should not be relied upon as tax advice. Always seek professional guidance from a qualified adviser before making decisions based on the MSC rules.