Contractors 'now liable for MSC debts'

Thousands of contractors were yesterday warned that as of August 6 they became potentially liable for the tax debts of managed service companies.

The alert from the professional service firm KPMG, and Giant group, an umbrella company, estimated that under new law, a £50k-a-year contractor could get a tax bill of up to £10,000.

They pointed out that contractors will receive an annual bill for PAYE & NICs if HMRC deems a service provider they use to be 'involved' in their outfit, or another contractor's outfit.

Matthew Brown, managing director of Giant, said that unlike IR35, the MSC legislation means contractors can't rely on safety in numbers.

He explained: "If IR35 was a precision tool, then the MSC legislation is a blunderbuss. All HMRC needs to do is aim at a single service provider and thousands of contractors will get hit."

But for the legislation to fully apply, the service provider would have to fulfil the definition of a MSC, as spelt out by the legislation.

In guidance a note, HMRC said: "Being an MSC Provider does not in itself mean that client companies are MSCs and that the MSC legislation applies.

"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."

KPMG advised yesterday that once HMRC deem an organisation to be an MSC Provider caught by the legislation, then the burden of proof is on the MSC Provider to prove otherwise.

But in terms of 'being involved,' as just one indicator to whether the legislation applies, HMRC has cleared up the worry for accountants.

In its guidance, the tax authority said: "Persons who promote or facilitate companies generally, as opposed to companies specifically to provide the services of individuals, are not MSC Providers.

It added: "The legislation provides a specific exemption for persons being MSC providers (involved with a company) merely by virtue of providing legal or accountant services in a professional capacity."

Like the exemption for providers of exclusively legal or tax services, John Chaplin, tax director at KPMG, reminded that in the legislation there is a specific exclusion for umbrella companies.

He said: "The debt transfer risk does not apply to contractors operating through umbrella companies, who have been deliberately excluded from the scope of this legislation."

Recruitment agencies, he added, will be able to include umbrella company as service providers on a preferred supplier list at "no risk" to themselves.
 

Editor's Note: Further reading here on Managed Service Company legislation.

 

Tuesday 7th August 2007