Is HMRC accusing you of being a Managed Service Company? Control will be the key
It would appear that the HMRC campaign highlight for the start of the 2022/23 tax year is going to focus upon Managed Service Company (MSC) legislation -- and alleged breaches of these rules by individuals and some “providers”, writes Thomas Wallace, head of tax investigations at WTT Consulting.
Two contractor accountants on the back foot against HMRC
There are currently two accountancy firms whose clients have been sent assessments on the basis that the MSC ‘conditions’ have been met and that the firms are MSC Providers (MSCPs). These firms have indicated their determination to resist what they describe as an unwarranted, inaccurate approach by HMRC.
Before I summarise our guidance from that online event, the starting point from HMRC’s perspective is that where a company nominally owned by the contractor is effectively controlled by an MSCP, then all sums passing through the PSC to the contactor will be taxed as though they were employment income, i.e. will be subject to tax and NIC. In practical terms this means the dividends are reclassified as earnings and taxed accordingly.
The first of many searching questions PSC directors should ask themselves
Crucially therefore, is the accountant or service company which your limited company used doing more than just back-office services?
First and foremost, who controls your PSC? If this is you, then the HMRC enquiry will be an irritation but one that can be defended and which should ultimately mean no additional tax bills.
If this is not you, but rather your ‘agent’ (in HMRC terminology), because their advice is always followed by you in key areas of your operation amounting to control or significant influence over how your business is operated, then you have a fight ahead.
Where modern contractor accountancy offerings make the MSC rules look very old
Be aware, it can be difficult to establish this question of control -- given that:
- modern accounting/service companies offer the advantages of increasing automation of standard services;
- accounting packages are almost all capable of converting receipts and income to full financial statements;
- smart models are available which will give you instant answers to the most efficient distribution of salary and dividends.
Problematically, there is very little in the original parliamentary debates in the run-up to the MSC legislation’s introduction in 2007 on the application of the rules to help distinguish between ‘normal’ accounting services and actions likely to breach the MSC legislation.
Furthermore, the leading MSC cases are occupied with some extreme examples which were (in our opinion), clearly too far inside the MSCP boundary for there to be much doubt.
Perhaps thousands to be snared in the taxman’s net
Contractors, encouraged by this, HMRC is now seeing how far that boundary can be stretched in order to snare perhaps thousands in their net. In doing so and by engaging only (as far as we know) clients of two alleged MSC Providers, HMRC demonstrates both the strength and a key weakness in the MSC rules.
To make use of the legislation, HMRC must show that the individual contractor’s circumstances are such that the generic and perhaps standard set of services from the agent somehow combine to meet one of the required conditions. In other words, either all individuals’ circumstances are so similar as to allow the MSCP’s service to be seen as a standard package; or the services provided by the MSCP are able to be flexed to meet individual circumstances as to how each business wishes to operate.
What happened/happens in practice (matters)
In practice, it is likely that some individuals will pick and choose which services to access from an online menu, while the putative MSCP will make known what can be made available.
Is that enough to meet the conditions? The answer is “sometimes.”
Individual circumstances can and will be critical here. Did you always do as you were advised or directed by the MSC Provider? Or did you make decisions on use of your PSC or accessing the funds of the PSC based on your own needs and conditions?
The position of portals
Clearly the use of ‘portals’ by many accounting or service providers, often backed by smart models and algorithms, is commonplace. At the time when the MSC legislation was introduced, we suggest that the use and scope of such portals was much less common or sophisticated and the absence of any clarifying statements or cases in tribunal since then, helps HMRC. A key question will therefore be:
When does a portal stop being a tool to supply information to or from your accountant, and move to becoming a platform through which your company is managed?
For contractors, the answer to this question will be fact-dependant.
But there is already attention turning to possible collateral arguments that HMRC could spin out of an enquiry into MSC status.
An influence on whether IR35 is in play
The MSC legislation was very specifically introduced to counter contractors simply inserting a company into a contractual arrangement without taking on any of the responsibilities and administrative tasks required of someone ‘in business on their own account.’ Almost certainly therefore many of the questions that HMRC will require answers to, will have some influence on whether IR35 is in play. The rules here are complex and slightly different from the sort of control and management tests in MSC rules, but great care will be needed in order not to go from frying pan to fire.
Contractors, the key to understanding the risk of falling into the MSC rules is being clear that YOU controlled YOUR company and that the services of the accountant or service provider were no more than the usual professional services on offer.
Nothing is more convincing in terms of evidence than contemporaneous exchanges.
So for PSCs, here are 10 key questions to tease out what you did, or didn’t do through the lens of control.
Top 10 questions to ask to gauge exposure to MSC legislation
- Did you ask for information or calculations on the optimum salary/dividend split or was this offered unbidden?
- Did you always follow the advice of the putative MSC Provider?
- Did you question that advice where it did not suit your then circumstances?
- When new contracts or renewals of contracts were in the offing, did you seek advice – or was it offered unbidden
- And if so, was it always followed?
- Did you set up the PSC or did somebody else?
- Who prepared/signed the company filings?
- Did the fees to the MSCP vary according to PSC activity and/or services offered?
- Did you pay for use of a job board or similar?
- Did the MSCP obtain commissions or additional payments if you took particular jobs or contracts?
Advice, or direction?
In particular, contractors need to consider carefully whether, in their dealings with your PSC, you took the information from the agent as “advice” or “direction”. Where you can show that you did not always do as suggested, that is a positive.
All of these ten or so areas -- and more -- will be relevant and you should begin to collect that information now if you’re a PSC in receipt of an HMRC assessment under the MSC legislation.
It’s obvious HMRC will probe more accountants, if…
We indicated at this article’s outset that there are two firms whose clients are presently targeted. We have no information as to whether more will be included in due course, although obviously if HMRC secures a significant amount of tax, they will look to extend their campaign.
There are suggestions on forums and elsewhere online that these firms were picked on by HMRC because they use (or don’t use) particular portals linked to external accounting platforms. In the absence of knowing the MSC legislation risk parameters selected by HMRC, it’s impossible to say if this was a factor. This will no doubt become obvious as enquiries are worked. It does not mean however that there is any suggestion that these firms are seen as having particularly egregious arrangements, or that other firms with very similar set-ups will be next in HMRC’s crosshairs.
Closing considerations for limited company directors with concerns
Aside from looking into the history of your interaction with the alleged MSC Provider, there are a number of practical matters you need to consider.
If you have had any sort of assessment or charge from HMRC (almost certainly a Reg 80 issued to the PSC), it must be appealed within 30 calendar days of the letter’s date.
If you are not sure perhaps because the registered office of the PSC is not an address you frequent, then check.
Do not destroy any records, hard or soft, but rather bring material together and make it available to your agent.
If you were in this position but are now no longer using the PSC, bear in mind that HMRC is looking at 2017/18. Think back to that time.
If you have an agent show them the assessments.
If you do not have an agent, this is a space in which an inexperienced adviser (even a gifted one) is going to struggle. The MSC legislation is wide, the cases unhelpful and the outcomes significant. Professional advice is very much recommended.
Finally, get comfortable
This is going to be a long campaign and we would expect other alleged MSC Providers being brought into the scope of it soon. Where you can present the facts in line with the above, early on, you stand a greater chance of removing yourself from HMRC’s spotlight before the enquiry develops much further. We would however expect HMRC to spend a considerable time collecting and collating information and to be in no hurry to remove individuals from their net until it is beyond doubt that the conditions are not met.
Editor’s Note: The author’s firm, WTT Consulting, offers prospective new clients a free initial call to discuss their situation and understand the options available.