It would seem HMRC’s assault on contractors has kicked up a gear and contractors who operate through their own Personal Service Company (PSC) now have another worry to contend with. Not content with changing the so called IR35 legislation a couple of years ago, effectively forcing a good proportion of genuine self-employed contractors into umbrella or PAYE employment, HMRC are now using the largely forgotten Managed Service Companies(MSC) legislation to further reduce the flexible workforce that is the lifeblood of many of the vibrant industries in this country.
A Quick History Lesson
Most of you will have forgotten what an MSC is, understandable given they’ve hardly been mentioned in a decade or more. An MSC is (usually) a one-man limited company which has been set up by an MSC Provider (MSCP). An MSC Provider is a company that is in the business of promoting or facilitating the use of companies to provide the services of individuals. The basic idea is that the rules should apply to those who are setting up and basically running the service companies on behalf of workers, who enjoy a largely hands-off experience. This is defined as involvement, more of which anon.
In 2016, HMRC had a success at the First-tier Tax Tribunal in a case against Costelloe Business Services Ltd (CBS). HMRC won this case because it was found that they were an MSCP because of their “involvement” in the businesses of their clients. This was appealed.
In 2019, the Court of Appeal handed down their decision that CBS was an MSCP, and therefore its clients were MSCs.
In early 2022, HMRC targeted Churchill Knight and Boox as potential MSCPs and have raised assessments to both them and their clients.
What’s “involvement”?
For the purposes of the MSC legislation, a service provider is involved in its client’s business if:
- The provider benefits financially when the worker provides a service (a percentage based fee for example)
- The provider influenced or controlled how the worker received their payment (calculating and instructing payments of dividends and salary)
- The provider influenced or controlled the worker’s company finances (full access to the bank account, say, or actually making payments from the account)
- The provider influences or controls the workers’ services
- The provider underwrites any tax losses
Crucially, only one of these forms of involvement needs to be met for an MSC arrangement to exist.
The Accountancy Exemption
It is not automatically assumed that an accountant, even an accountant specialising only in contractors, is an MSCP.
The appeal court observed “an accountant or other support service will not be caught even if some of its customers are PSCs because although in a broad sense it might be regarded as facilitating those PSCs in the running of their business, that assistance is merely a consequence of the services it provides, it is not in the business of doing that.”
Most accountants assist their clients in the running of their businesses. Much of the advice provided relates to tax-efficiency. It would be remiss of any accountant not to assist their clients in arranging their affairs in the most efficient manner. This would often extend to advise the tax efficient “salary” to pay, and how much dividends are recommended or advised. This does not mean that the accountant is an MSC Provider.
We’re pleased to say that Acumenica fall into the second lowest category. While we have a particular focus on the contractor market, we also have a thriving general practice looking after many other types of business.
Who should be worried?
First and foremost, clients of Churchill Knight and Boox should be paying close attention to this,as these are the primary targets right now. Clients who were involved with some of the larger contractor accounting specialists should also be keeping an eye on the post mat.
If you’re not sure whether your accounting service was potentially an MSCP, here are some of the hallmarks:
- You were told to form a limited company by your agent and to deal with this service provider
- The service provider raised invoices on your behalf
- Your service was “cookie-cutter” in that you had no substantial discussions with them regarding your income and how it should be handled
- The service provider had control of your bank account
- The service provider’s fee was based on your income – as a percentage for example
- The service provider offers a limited company to umbrella and back again option
MSC Debt Transfer Provisions
The MSC legislation contains quite brutal debt transfer provisions. Generally speaking, it is the PSC that faces the potential liability if the MSC rules apply. If the company can’t pay then the next in line is the director. However, if the PSC or its director cannot pay, then HMRC can transfer the debt under the ‘recovery from other persons rules’ in ITEPA 2003 s 688A. The first port of call will be the MSC provider and its directors. If the MSCP can’t pay due to involvency, and there is evidence that a referring staffing agency ‘encouraged or was actively involved in the provision by the MSC of the services of the individual’, then there is a risk that the tax debt could be transferred to the staffing agency and its directors. Although less likely, it is also possible that a hirer could face tax debt transfer if they encouraged contractors to work through PSCs and to use certain advisers to effect this. Everyone in the supply chain needs to be aware of their risk.
Next steps
If you have any concerns about whether you are likely to be caught, we’d advise you to contact your accountant in the first instance. Alternatively, you can contact Acumenica on
