MSC rules: alive and still kicking contractors

Life happens when you’re making plans is the old adage. But in the case of contractors, it has turned out to be the MSC legislation that happens while they try to make plans for Autumn Statement 2015, writes Carolyn Walsh, a director at CWC Solutions.

So while most of the contractor market has been focussed on what might or might not happen to the legislative landscape on November 25^th, some have received a tax determination for tax and NICs under the almost long-forgotten MSC legislation.

A whole world of pain

The long and short of it is that a band of contractors who thought they were using a bona fide accountancy service have suddenly received a letter – and demand – from the taxman. In other words, they’ve received no warning; just a brown envelope and a whole world of pain.

It all stems from an investigation that is currently underway by a HM Revenue & Customs Special Investigations team, into at least one company which purported to be an accountancy service provider for Personal Service Companies. These PSCs, as is typical today, were using a recruitment agency which promoted the accountancy service provider to the contractors, who took that advice suspecting nothing odd at all.

Note; I say ‘at least’ one company because the provider’s directors set up a phoenix company earlier this year and tried to shut down the original company, but HMRC blocked their action. The debts accruing under MSC legislation could therefore be borne by the two company directors and furthermore (and as the phoenix company is operating in much the same way), I understand that both structures have been identified by HMRC as a Managed Service Company Provider (MSCP). Presumably future incarnations will too, until of the course the company directors operate lawfully.

What HMRC expects of contractors

Having spoken with one of HMRC’s special investigators, it’s clear to me that HMRC expects the contractors issued with demands to pay the debt from present company income, and only if he or she is unable to pay will the debt transfer to the directors of the MSCP and then potentially, the agency.

So it’s lose, lose, for those contractors caught by the ineffective tax management of their company income by an MSCP, because it seems that he or she must be rendered practically destitute in order to escape any tax debt.

Shortly, HMRC will have completed their enquiries and every contractor paid through that accountancy company will receive a tax demand against their own PSC. There is a sense among those at the coalface of this tax grab that this has been just as big a shock as the Accelerated Payment Notices (APNs) issued against users of DOTAS registered schemes.

In the interests of transparency, it should be made clear here that I have been representing a genuinely self-employed business owner who was encouraged by an agency to leave his own accountant to use this particular accountancy service provider. The agency, in order to promote the service provider, promised him that the accountancy outfit would ‘do everything for him and save him money.’

Paying the price

Unfortunately for the businessman, this advice was unsound and he has been landed with a tax bill of nearly £7,000 in respect of income of just £22,000. He’s also the lost the right to claim tax relief on his travel costs and business expenses, other than a derisory £50 per week allowed by HMRC in its calculation deeming PAYE on his company income. This reflects the fact that if you’re a contractor using the wrong type of accountant to manage your business affairs, not only is company income converted to employment income under the MSC legislation, but tax relief on most work-related expenses is barred too.

More positively, HMRC have demonstrated a fair amount of understanding of the businessman’s position, saying that they recognise that if he hadn’t accepted the advice given by the recruitment agency, he may not have been given the work. Responding quickly to the Revenue’s queries appears to have gone in our favour too, in the form of penalties being suppressed. The tax department’s attitude suggests that they understood that while there was no deliberate wrongdoing on my client’s part, because he had benefited from paying less tax, he still had to pay the price.

^{Contractors, disengage...}

The moral of this tale is for contractors to disengage from companies which may fall within the scope of MSC legislation; these are fully described by in HMRC’s ESM3520. Do this as soon as possible and then engage a bona fide accountancy practice or a company which does not fall within the scope of MSC legislation. There really is no choice or escape from this piece of tax legislation other than closing your company and declaring bankruptcy, which is no choice at all.