Should contractors be worried about HMRC and MSC legislation?

Should contractors be worried about HMRC and MSC legislation?

‘Managed Service Company (MSC) legislation was introduced as HMRC’s in the early 2000s. It was its answer to the proliferation of firms offering composite company arrangements for contractors.

As always, some composite company providers kept within the law whilst others sailed very close to the wind. Some even managed to break the line!

Whilst HMRC had some success in closing down some rogue composite company operators they were ineffective against those operating entirely legally.

What is a MSC?

A Managed Service Company is one in which contractors work together under an umbrella. The members are appointed as shareholders and directors. Being shareholders, they can receive minimum salary payments with the rest of their income paid as dividends.

Promoters of these schemes were usually accountants’ firms. They used their knowledge so contractors were paid more rather than giving it to the tax man. The promoters would take a fee for managing the company or companies the individual was a member of.

‘Disguised employment’

HMRC’s view was that this was merely disguised employment and that were it not for the scheme then the worker would be an employee.

However, this view and had no legal status. Whenever they tried to go after the promoters they would incur huge amounts of time, effort and money in trying to close these schemes down.

Having some success, HMRC sought to legislate against these schemes and brought into law the Managed Service Company legislation in 2007.

Why is it in the news now?

MSC legislation was aimed at the promoters of such schemes. An MSC is defined by HMRC as “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.

Furthermore, for the MSC legislation to apply the service provider must both fulfil the definition of an MSC Provider and be involved with their client companies.

HMRC guidance further states, “An accountancy/tax adviser, whether or not professionally qualified, who provides advice to clients who are service companies is not an MSC Provider merely by virtue of their client base. The test is whether a person is carrying on a business (or a discernible part of their business) of promoting or facilitating the use of companies to provide the services of individuals.”

And that is the problem. How do you distinguish between an accountant who provides advice and one who actively promotes the use of limited companies for this purpose?

Contractors have been caught up in this for two reasons:

  1. HMRC think that such promoters exist and have identified firms who offer the facilitation of these types of companies to contractors and
  2. To safeguard HMRC’s ability to raise inquiries for tax year 2017/18 before they lose the option under the four-year time limit by the 5 April 2022, they have issued assessments on contractors for allegedly unpaid tax

The legislation is now making headlines as those accountants who were promoters are being chased by HMRC. It appears there is a more action being taken than previously.

If you are caught by the MSC legislation what should have happened?

The tax treatment of those contractors using an MSC promoter should have followed the legislation set out below from the dates indicated.

  • From 6 April 2007 all payments received by individuals providing their services through Managed Service Companies (MSCs) will be subject to PAYE:
  • The cost of travel from the individual’s home to the individual’s place of work is not an allowable tax-free expense for workers within MSCs from the same date;
  • From 6 August 2007 National Insurance Contributions are also due on all payments received by individuals working through MSCs
  • Also from August 2007, where the PAYE and NICs debts of an MSC cannot be recovered from the company, HMRC may transfer the debt personally to
    • The company’s director; or
    • The MSC Provider
    • Debts may be transferred to other third parties from 6 January 2008.

So, what do you do now?

If you have received an assessment do not ignore it. You have 30 days to submit an appeal. If you use an accountant, contact them and they should assist you in submitting an appeal and keep you informed of their own appeal if they too have been assessed as a MSC promoter by HMRC.

If you don’t have an accountant but have received an assessment then contact us now. You can call 01642 927265, book a call, email us at [email protected] or fill in our contact form.