What the MSC guidance really means
End clients won't pay managed service companies' tax debts if they receive services of a worker if those services are provided via a company which existed before they approached the client.
But should the client give advice to the worker that operating through a company could be beneficial, this could bring the client within the transfer of debt rules, making them liable.
Even so, HMRC would still need to "look carefully at the precise circumstances giving rise the worker operating through a company and whether such a company was a MSC."
These verdicts, and more, appear in guidance on the MSC legislation, issued by HM Revenue & Customs, aimed at clarifying it for workers, clients, service providers, recruiters and advisors.
"We note that the guidance is intended for many different user groups who could potentially be affected by the rules," the ICAEW's Tax Faculty said in a statement.
"[We] cannot help wondering whether individuals who may be offering their services through MSCs might not be better just seeking professional advice, and quickly."
But in their analysis of the 48-page guidance note, published last week, experts at the Institute of Charted Accountants for England & Wales said "much of it" was anticipated by advisors.
Roger Sinclair, legal consultant at Egos Ltd, an advisory for IT contractors, agreed.
He told CUK: "There are no great surprises here. Just be aware that it [the guidance] represents HMRC's view on what they would like the legislation to mean, or think it means – a court may take a different view.
"As in the case of HMRC's interpretations of s660A we saw a few years ago, with which the Court of Appeal fundamentally disagreed (the House of Lords is still considering this), HMRC may end up being held to be wrong."
Happily for Mr Sinclair, the guidance confirms that a lawyer offering specific advice, even that relating to the formation of company, is excluded from the transfer of debt provision.
Similarly, the online guide goes on to theorise what services would comprise being 'involved' with the company – an aspect of the note accountants have been waiting for with bated breath.
It says that the preparation of VAT, corporation tax and PAYE returns at the request of client following receipt of tailored advice (providing it is not part of a standardised product) do not qualify as being 'involved.'
Even more reassuring for tax advisors is the declaration that "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."
The guidance adds: "This specific exemption applies only to persons professionally qualified (or training for a professional qualification) regulated by a regulatory body."
There is also some good news for employment agencies, which have vocally opposed being liable for a contractor's tax debt.
In the guidance, HMRC acknowledge that the "core business function" of a recruitment agency is to "place individuals with persons who wish to use the services of those individuals."
These individuals operate through companies, the guidance states, adding: "For this reason the core business function of employment business/agencies is specifically excluded from the transfer of debt provisions."
But if an employment agency "enters into activities that go beyond the core business function", then they will not be within this exclusion, and risk being liable for unpaid tax debts.
In addition, 'back office service providers' who provide support functions, like payroll services, to clients including, but not exclusive to, MSCs are outside the scope of the legislation.
For all parties potentially affected by the legislation, the guidance clarifies that what counts, in the eyes of HMRC, is what actually happens, not what the formal contracts say is meant to happen.
Paul Giles, partner at Browne Jacobson, said: "The potential vagueness of the borderlines of who is affected by these rules is underlined by a number of statements," in the guidance.
"[For example]HMRC, [says it] will look at all factors in deciding whether a person is 'exercising influence', or 'controlling' how the structure operates, and in the case of control will look at 'the level of understanding of all relevant parties in the arrangements which they are said to control".
"In other words, it is what actually happens that will count and unless there is confidence that the MSC rules cannot apply there will still be risk in all but clear-cut cases."
The Midlands-based law firm explained that in the case of an end user, they can be liable if they have a "selective policy" of requiring contractors to operate through companies.
Likewise, they can be liable if contractors not operating through companies are given 'advice' that providing their services through companies might be more beneficial.
But overall, the guidance follows the legislation rather closely, Mr Giles said yesterday.
He told CUK: "Most of the interest in the guidance is the explanation of how to account for tax (and from 6 August NIC as well) on payments from managed service companies, and on the assurances as to the extent of the 'debt transfer' rules.
"The bizarre things about these rules is that they are not intended to be used – the plan is presumably to kill the MSC sector dead, and it is only if, as with IR35, the legislation does not achieve this aim that the detailed guidance will come into its own."
He added: "The guidance seems to help considerably in confirming that the potential scope of the legislation will be limited, but it does not give certainty in borderline cases and there is still going to be real risk for end users, in particular where they are involved to any extent in taking on contractors through MSCs, unless the MSC arrangement was already in place."
HMRC have said the guidance is designed to clarify aspects of the anti-avoidance legislation after feedback from affected parties suggested it was ambiguous.
Editor's Note: Further reading here on Managed Service Company legislation.