MSC clarifier: The truth about HMRC standstill agreements

In the world of MSC enquiries, HMRC has issued so-called standstill agreements to companies under investigation.

These agreements come after delays on HMRC’s part in moving enquiries along and are probably a sign that the taxman has realised he’s bitten off more than he can chew, writes Nikola Nowak, tax consultant at Markel.

How have HMRC standstill agreements come about?

As some contractors already know, HMRC only has four years to collect tax and six years to collect National Insurance Contributions. If the enquiry drags on for too long, the Revenue risks tax years ageing out of their jurisdiction.

It is important to note here that if HMRC suspects criminal activity or fraud, they are able to go back as far as 20 years. However, this is in extreme circumstances and will (most likely) not apply in MSC enquiries.

Protective writs

To protect their interest to collect NICs while the enquiry is underway, HMRC have to apply to a court for a protective writ. Provided this is issued within six years of the original due date of the NICs, this will allow HMRC to collect said-NICs (and interest) should the case ultimately go in their favour and the courts decide that the relevant legislation applies to the taxpayer. This is the case for any enquiry where NICs is disputed, whether that is status, IR35 or Managed Service Companies and is a fairly commonplace procedure.

Nevertheless, a protective writ has to be applied for every year for the tax year that is about to ‘fall off.’ If HMRC fails to apply for, or misses a year, they run the risk of not being able to collect the NICs. Of course, there is no point (in HMRC’s eyes) of pursuing MSC cases if the result doesn’t lead to additional money in the pot!

To allow themselves time, and to protect all of the NICs and interest all in one go, HMRC has issued proposed ‘standstill’ agreements. These agreements would put all litigation on hold -- from both sides -- for however long HMRC believes they require to complete their enquiry.

What is an HMRC standstill agreement?

It is a proposed contract by HMRC and is by no means compulsory; the taxpayer has every right to decide not to sign the agreement and if you find the terms of the contract to be unsuitable, you have the option to negotiate. Whether HMRC agree to any changes is a separate issue, the point here is that the taxpayer is under no obligation to sign the agreement. This cannot prejudice the case or lead to higher penalties, and is not in and of itself evidence of a lack of cooperation.

It should also be pointed out that standstill agreements are unusual in that you don’t see them very often. We think this shows that HMRC are struggling with the amount of enquiries underway, whether that is due to lack of personnel or sheer quantum of evidence they’re having to process.

What happens if a contractor doesn’t sign a standstill agreement

If you do not want to sign a standstill agreement, you will go down the protective writ route. This means HMRC will apply to a court for every tax year that is about to run out of time (for NICs), and you will have to respond to the writ within 14 days to dispute the figures claimed by HMRC on the writ. This cannot be signed by an agent; it has to be signed by the taxpayer under enquiry.

If you fail to respond within 14 days to confirm your grounds for dispute, the NICs, interest and any tribunal costs will be processed by the court and you run the risk of a County Court Judgment (CCJ). This means that every time a new writ is issued, you must appeal it within 14 days.

This is not to say that this route cannot be taken or that its less advantageous – it just means that you have to be prepared and organised for the task of responding to the writs every year.

Penalties

In status cases – and even more specifically; MSC cases, it is hard to ascertain whether the legislation applies or not. The legislation is not simple, as we know, this is a grey area of tax with very limited case law.

Therefore, there is room for errors on the taxpayer’s behalf even after careful consideration, and HMRC will have to sympathise with this point when applying penalties (if they are able to apply any penalties at all).

Penalties by HMRC are determined by the specifics of the case and what evidence you, the taxpayer, are able to present in your favour. Unless of course you have deliberately caused a tax loss and then made an explicit attempt to conceal this loss by falsifying evidence, it is highly unlikely that you will automatically be subject to any level of HMRC penalty.

Conclusion

MSC cases are complex tax issues, and we sympathise with the stress and anxiety that comes with a HMRC enquiry of this kind where it is the existence and behaviour of a third party (the MSC provider) that determines your tax position.

The most important point to take away is that whether you agree to a standstill agreement or not, is entirely a personal choice. No one knows your case better than you and your tax agent, so it is important to weigh up the pros and cons before you sign. But rest assured that declining to sign a standstill will not affect the tax position of your appeal, nor will it result in higher penalties.