Industry-led MSC schemes 'are no surprise'
The contracting industry is devising schemes or badges of approval to reduce the fear factor of its key players owing employment taxes under the MSC legislation.
Workers, end users, umbrella and recruitment firms are all worried PAYE and NI demands will be incoming, if they engage a firm deemed a managed service company (MSC) by HMRC.
The government believes workers who use MSCs – outfits managed by third parties – do not exercise control over such companies and therefore are employees and must pay tax accordingly.
The taxman did hope to accredit companies that met a standard outside of the criteria to be a MSC, so parties could engage those companies free of reprisals under debt transfer rules.
Under the rules, the debt of a MSC can be transferred to any party in the contractual chain, so workers, agencies, end clients and service providers are all potentially liable.
Last month ,Revenue & Customs said accrediting a company to reassure such parties they would not face employment tax bills, for engaging that company, would be unworkable.
Although HMRC will next month unveil a framework to help assess the make-up of a MSC, industry has already begun unofficial initiatives to reduce exposure to the transfer of debt.
Professional Passport (PP) is a new organisation offering every party in the contractual chain - contractor, agency, end client and provider - support on how to comply with the MSC rules.
Contractor members pay to access a list of service providers, accountancy services, contract review and umbrella firms that are deemed 'MSC compliant' by PP's auditors.
"What the debt transfer rules have created is a situation where everyone recognises that they are in a potential liability together and need to address that liability," Crawford Temple, founder of Professional Passport told CUK.
"Every provider in the market today makes claims of complete compliance; what everyone knows is that this is not really the case.
"Now that everyone in the chain shares risks it is in everyone's interest to work closer together to solve the issues" and set high standards for compliance with the MSC rules.
Professional Passport says contractors can be certain, "or as certain as any of us can be", that it only deals with "what we believe are compliant providers."
Prospective agency members, whose annual membership costs £1500 a year, were reminded they may be transferred a tax debt even if the provider they engage is on PP's lists.
If the agency gives any type of advice to contractors about companies to use, or as HMRC puts it, "enters into activities that go beyond the core business function", they risk liability.
"Our process is designed so the agency takes no action that brings them into the scope of the legislation," Mr Temple said, "therefore they can't have the legislation applying to them, meaning there is no debt transfer liability for an agency.
For contractor members, Mr Temple said that he cannot give "any guarantees that the providers on our site are 100% compliant."
Adrian Marlowe, managing director of Lawspeed, added: "True validation [of a provider] is simply not possible in the absence of formal legal HMRC approval."
But Mr Temple added some reassurance: "If one of the providers on our site was deemed non-compliant [with the MSC law]… assuming that there was monies still owed, we would have a debt transfer notice served upon us."
The PP site, which is independent and due to launch for contractor members on Friday, coincides with the creation of the Association of Employment Management Companies.
Aimed more squarely at umbrella companies, AEMC aims to set a kitemark standard for compliance with the MSC rules.
An AEMC spokesperson said: "Transfer of debt liability does not arise when the recruitment agency is working through an AEMC member company. All contractors are employed by the AEMC member who ensures that the correct tax and NI is paid."
In the MSC legislation, accountancy firm KPMG has pointed out that there is a specific exemption for umbrella companies, in an exclusion that eases the fears of recruitment agencies.
And the firm has done more than just offer advice. It recently audited SJD Accountancy, and its umbrella company, ContractorUmbrella, as "not being caught by the MSC legislation."
Simon Dolan, group managing director, reflected: "I am delighted that both SJD's and ContractorUmbrella's businesses have received KPMG's accreditation.
"I feel sure that a very large burden will be lifted from recruiters who are looking to recommend bona fide accountancy firms and for contractors who are looking for a safe pair of hands to manage their tax affairs."
Asked why he sought independent approval of his umbrella and accountancy firm, both of which are types of business eligible for exclusion under the MSC legislation, Mr Dolan was clear.
"Simply because the legislation is so vague and ambiguous," he said yesterday.
"The Revenue have constructed very ambiguous legislation as to what exactly constitutes an MSC, and the penalties of being classed as an MSC are so great to all parties involved that everyone (agents, accountants and contractors alike) is looking for some form of reassurance," Mr Dolan added.
"Initially the Revenue wanted to offer an 'audit' scheme but it seems like this will be less than 100% effective as it will offer no guarantees. The next best thing, then, is to have an independent third party audit the business and offer their opinion as to the likely exposure of the firm."
Meanwhile, HMRC is not surprised that industry is creating its own structures to reduce the risk of being caught by the MSC debt transfer rules.
A spokesperson said: "The emergence of new trade associations, commercial models designed to provide levels of assurance, and reviews with public 'endorsements' of some service providers are not unexpected.
"Those potentially exposed to transfer of debt will not only wish to take reasonable steps to mitigate their exposure to transfers of debt, but will wish to demonstrate that they have taken such steps.
"Whether a company or person chooses to avail themselves of such associations, models or reviews, are commercial decisions. It is not for HMRC to advise on how a person should take steps to mitigate their exposure to transfer of debt."
Jan 30, 2008