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Over the last twenty years there has been an increasing tread for workers to provide their services to clients using an intermediary company.  There are two broad types:

Personal Service Companies (PSCs): the company sells the services of the worker, who is usually the director of the company as well.  The worker is paid a salary, and can receive dividends as a shareholder of the PSC.

Managed Service Companies (MSCs): the company sells the worker’s services, but the worker has no control over the business.  The company is run by a scheme provider, supplying these generic company structures to workers, and administering the schemes.  As with PSCs, workers are paid a salary – often set at the National Minimum Wage – along with reimbursed expenses and dividends.

Individuals providing their services this way can make significant tax savings by taking their remuneration in the form of dividends rather than a salary, as this type of income is not liable to National Insurance contributions, and, prior to reforms in 2016/17, could be received tax-free by basic rate taxpayers.

In April 2000 the Labour Government introduced legislation to ensure that income earned by a PSC when the individual was, in effect, being employed by their client, would be taxed as earnings. These statutory provisions – the ‘intermediaries’ legislation – are often referred to as IR35, after the number of the press notice when this measure was first announced.[1] 

Over the next few years HM Revenue & Customs found considerable difficulties to using the IR35 rules to tackle tax avoidance by MSC workers, whose numbers had grown substantially over this time: from around 65,000 in 2002/03 to at least 240,000 in 2005/06.  In December 2006 the Labour Government published a consultation paper, alongside the Pre-Budget Report, with proposals to remove MSCs from the scope of IR35 and tax MSC workers as employees.[2]  Following responses to this document, the Government confirmed it would proceed with these changes in Budget 2007.[3]  Provisions to determine the income tax treatment of MSCs are contained in the Finance Act 2007 (section 25 & schedule 3).[4]  The new rules came into force on 6 April 2007.  At the time it was estimated would raise £350 million in 2007/08, rising to £450 million in 2008/09.[5] 

The introduction of this avoidance legislation appears to have dealt with the concerns over the use of MSCs – although there have continued to be developments, both in market practices and in legislative requirements regarding the classification of individuals as an employee or as self-employed for tax purposes,[6] and the application of the IR35 rules.[7]

Notes :

[1]    see, Personal service companies: introduction of IR35, Commons Briefing paper CBP914, 6 September 2018. Guidance is published on

[2]    Pre-Budget Report, Cm 6984 December 2006 paras 5.98-9. HM Revenue & Customs, Tackling Managed Service Companies, December 2006.

[3]    Budget 2007, HC 342 March 2007 para 5.115

[4]    Changes to the scope of NICs to mirror these rules were made by Order (SI 2007/2070), which took effect from 6 August 2007.

[5]    Pre-Budget Report, Cm 6984 December 2006 p226. Guidance on the MSC legislation is set out in HMRC’s Employment Status Manual – see from para 3500.

[6]    see, Self-employment in the construction industry, Commons Briefing paper CBP196, 23 August 2019

[7]    see, Personal service companies and IR35, Commons Briefing paper CBP5976, 9 April 2020.

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