Managed Service Company (MSC)
Managed Service Company (MSC) Process
Managed service is a process or practice where you outsource certain processes and functions on a proactive basis which are meant to improve operations and is considered as an alternative to the common practice of on-demand outsourcing where service is provided on demand and payment is done only after the work is done. Outsourcing functions can include outsourcing database, production support and lifecycle build/maintenance activities.
A managed service provider is most often an Information Technology (IT) services provider that manages and assumes responsibility for providing a defined set of services to its clients. Under this subscription model, the managed services provider is the service provider responsible for delivering the managed services as asked by the client or customer, where the later one owns and has direct oversight of the organization which is being managed. Today more and more companies are adopting for the managed services subscription model because it helps you to stay up-to-date on technology and easy access to skills, quality of service and risks associated with the same, if any.
Definition of managed service companies (MSC)
Basically a managed service provider is a company that remotely manages a client’s or customer’s IT infrastructure or end-user systems and a business model using managed services is quite different from others and also charges under a number of different pricing models. As mentioned above, a managed service provider will charge a flat fee for each user and the customer pays the flat fee as per the regular schedule, which could either be weekly or monthly affair and thus provides the managed service providers with a monthly recurring revenue, which provides a more stable and predictable base of business in contrast to IT projects.
The main challenge for a managed service provider is to set its pricing appealing enough to attract or entice a client or a customer but should be high enough so that profit is not compromised and an adequate profit margin is maintained because labor is greatest expense of a managed service provider and in order to keep a check on labor costs and efficiency, most of the managed service providers opt for remote monitoring and management in order to keep a tab on the clients IT functions. Also just becoming or functioning as a managed service provider is an uphill task in itself and it takes a lot for the managed service providers to establish themselves in the market because in order to do so, one has to adopt various performance metrics, technology infrastructure components and sales compensation programs.
A managed service company, also known as MSC, is a popular form of company structure in the United Kingdom and for a company to be a managed service provider, it must fulfill below mentioned conditions:
- A company must be dealing mainly with providing directly or indirectly services of an individual to third party clients.
- The payment of the worker or the individual supplying the services to the customer or the third party client is either equal to the greater part of the sums received from the client for the availed services.
- The payment received by the worker is 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 and the comparison is done every time the payment to the worker is made and thus is not an annual comparison. Also the comparison is made between the actual payment received by the worker and the actual payment which he would have got in case it would have been an employment income, mainly because in case of an umbrella company, its workers are treated as its employees and any payment made to them in the form of salary and allowable expenses is considered as employment income and thus implies that the payment received by umbrella company is same as he would have got had he been employed with any other. It also allows for the deduction of expenses allowed under the Taxes Act.
- In order to meet the fourth condition, there has to be a dedicated MSC provider, who must be involved with the company.
For example: If a company has provided a service to a third party and has received a payment of £600 and pays first payment of £450 to the worker who has provided the mentioned service and thus the worker has received an amount equal to the greater part of the amount received for the services, and if
If the second payment of £350 is paid to the service provider against the receipt of £600 from the third party client, now the comparison is between £1200 against £800. Even in this case the worker has received an amount equal to the greater part of the received payment.
As per the legislation IR35, for a company to qualify as a managed service provider, it must be carrying on a business of promoting or facilitating the use of companies in order to provide the services of the individuals, where
- Promotion is not related to the promotion of a business but it rather means promotion of a certain type of products, especially providing the services of an individual; and
- Facilitation is used in its normal context such as helping, making easier or enabling.
And the legislation also provides certain exemption to the companies merely by the virtue of the activity described and following does not qualify as a MSC provider:
- A chartered secretary
- A company formation agent
- A tax advisor who is carrying on the business of being a tax advisor generally
- A firm of accountants carrying on a business of being accountants
- Service providers who are providing services such as insurance companies, payroll bureau to the companies.
- A trade association operating in the service sector and
- An employment agency or business having its core business of placing its workers with end clients.
Impact of the MSC legislation on contractors
By introducing the MSC legislation, the aim or the intention of HMRC was to arrest the real time situations where contractors were using tax and National Insurance schemes and using the limited company to obtain work either directly from an end client or via a third party because HMRC was of the opinion that a major chunk of non-executive directors, IT consultants, Engineers and one man band companies should be treated as employees of the end client rather than being considered and treated as self-employed and if the personal service company or the agencies are removed then a large number of contractors would be employees who should be included on the client payroll and have its tax and NIC deducted each month.
It was an observation of HMRC that lot many contractors are operating under composite company scheme despite falling under the IR35 legislation and are thus ignoring the same and although it was not possible for the HMRC to challenge each and every case, it rather thought of implementing a new legislation in order to remove the issue by making it mandatory for all the contractors to pay the tax as they would have done had they been employed and have got employment income.
IR35 legislation implementation has been a successful one and as a result of which thousands of contractors and their service providers were affected by it i.e. the contractors on whom HMRC could lay its eye on were liable to full Pay as you earn income tax and NIC on their fee income from the managed service company as they would have got had they been employed by their managed service company.
Also the MSC legislation has direct impact on the agents as well as clients because it made them liable for any unpaid debts that have arisen through the non-payment of income tax and NIC by the managed service company and in order for the HMRC to enforce and implement the above mentioned rule, it was important for a client or the agency to be actively involved using contractors working via managed service companies dealing with promotion of managed service company.
Introduced on 6th April 2007, the MSC legislation intended to prevent the contractors using any third party to manage their tax affairs under the disguise of a limited company status and before the legislation was enforced, the contractors were the sole shareholder of a limited company where a part was paid as basic wage whereas the rest as dividends, however, you are eligible to get paid in dividends, only if you do not qualify under IR35.
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