HMRC using MSC legislation to extract 'tens of millions in tax,' contractors warned

Contractors are suddenly being chased for “potentially tens of millions in tax” by HMRC, suspicious that they are Managed Service Companies, and their accountants, MSC Providers.

Initiated by HMRC last month probing Churchill Knight and droves of PSCs who used the tax firm in 2017/18, the chase, while seeming out of the blue, is well-timed by tax officials.

In fact, the four-year time limit for assessment which HMRC is legally entitled to scrutinise contractors for that tax year expires on April 5th 2022 -- this coming Tuesday.

‘Abuse of legislation’

Boox, another accountant, is also on the receiving end of an MSC probe, which one of the tax authority’s ex-inspectors believes contractors could have almost set their calendars for.

“Like they do every year, HMRC has issued assessments to stop the year being time-barred,” says Tom Wallace, now head of investigations at tax dispute advisory WTT Consulting.

Reflecting on the protective assessment notices for 2017/18, the former taxman added: “It does not mean that the Revenue has reached a conclusion -- just that they are running out of time.

“It is an abuse of the legislation [found at Section 34 TMA 1970], but one they use every March.”  

‘Practical way to proceed’

To try to support contractors from becoming victims of that abuse, the dispute advisory will this week run a webinar to flesh out their initial advice for the affected.

Ahead of the Thursday webinar, WTT’s advised: “Evidencing clearly that the fact-pattern does not correspond with HMRC’s assessment of the legislation, is the practical way to proceed.”

The webinar is billed as a “public event,” and with potentially very good reason.

That's because many more contractors and accountancy firms may receive word that they are flouting the April 2007 legislation.

‘Many other contractor accountancy firms may be in the queue’

In particular, the fear at the time of writing is that if HMRC goes after Churchill Knight (which denies it is an MSC provider as per its statement below); and Boox too; then similarly-modelled accountancy firms could be probed next.

Declining to be named, and acknowledging that he was speculating, one chartered accountant said last night:

“[Should this HMRC activity have] a bit of traction in it, and if Churchill Knight are in the crosshairs, what about Brookson, PayStream and Parasol? Many others may be in the queue.”

Firming up the possibility of a staged MSC-enforcement campaign by HMRC, the initial batch of MSC letters to Churchill Knight and its contractors was received towards the second week of March 2022, but online posts indicate that Boox contractors started receiving their HMRC letters on Thursday March 31st.

‘Taxman pursuing potentially tens of millions from contractors’

An adviser to contractors Seb Maley reflected: “It’s become clear that HMRC is ramping up its compliance activity in this area, pursuing potentially tens of millions in tax from contractors. 

“The tax office has already sent letters to thousands of contractors, effectively accusing them of breaching the MSC rules and demanding thousands in PAYE tax from them.” 

The chief executive of Qdos, Mr Maley added: “If the contractors can’t pay this, the liability travels up the supply chain, meaning contractor accountants, agencies and even end-clients could be impacted.”

The conditions for when the so-called ‘third party debt transfer’ provisions are actioned by HMRC were the subject of official guidance in July 2007.

And the guidance remains in place today, in 2022.

‘Promoting or facilitating’

Outwardly reassuringly for accountancy firms (and contractors who use accountancy firms), the HMRC guidance says that an accountant or tax adviser who provides advice to PSCs is not a MSC provider merely by virtue of their clientele.

“The test is whether a person is carrying on a business (or a discernible part of their business) of promoting or facilitating the use of companies to provide the services of individuals,” the guidance adds.

Aside to the MSCP needing to be “involved” with the contractor companies; there are five conditions which HMRC says must all be met, and three mandatory conditions to be deemed an MSC.

‘Sensible to explore the conditions’

In an online advisory clearly aimed at Churchill Knight and Boox contractors, WTT Consulting said: “In all of the assessments we have seen from HMRC so far, they have cited Conditions ‘A,’ ‘C’ and ‘D’…as having been breached.

“[All] the assessments pre-suppose the involvement of an MSCP, which is required for these conditions to be met. There may be option to challenge this assumption, but, for now, it would be sensible to explore the conditions”.

To gauge the applicability of the conditions, the individual actions that affected contractors took, and their accountants took, albeit for both parties back in the scrutinised tax year of 2017/18, are requiring some significant memory-jogging.

‘'Control' isn’t about charging an annual fee’

But PSCs paying their accountants once a year isn’t universally seen as among the red-flags (despite one MSCP condition [‘A’] being that it benefits “financially on an ongoing basis from the provision of the services of an individual.")

“‘Control’ which is explicit in three of the five conditions for being a MSCP isn’t about charging [PSCs] an annual fee,” argues Andraste Accounting managing director Carolyn Walsh.

“Control is more about influencing how payments are made to workers through the use of a ‘standard product.’ And I have to say, many big contractor accountants do operate this way.

“This type of accountancy package is designed for volume management [which part explains why accountancy firms tend to have their own-built single portal]. The package is also designed for ease-of-use for the contractor.

“Yet unfortunately, all the signs from HMRC are that HMRC doesn’t see it that way and it clearly wants to stamp out the practise of causing the worker/directors to receive salary and dividends instead of just salary as some kind of a business model.”

‘May encourage many limited companies into the arms of umbrella companies’

A former tax inspector, Walsh says her old employer prioritises two questions when quickly asking itself if entities look like they could be caught by the MSC legislation.

First, ‘Does the ‘accountant’ promote or facilitate the use of a company?’ and second, she says HMRC follows-up with, ‘Does the company provide the services of an individual?’

Walsh isn’t alone in suspecting a wider play from HMRC, on top of its officials eyeing reams in employment taxes which it suspects potentially controlled, managed PSCs ducked.

“This move will generate huge revenue but more importantly it may encourage many who are currently ‘LTD’ and working through a similar [accounting] solution into the arms of the umbrellas, thereby a huge win for Hector.”

‘Floodgates will well and truly open’

A ContractorUK Forum user continued: “If Churchill Knight and Boox fail to win [their appeals against the HMRC assessments and so do not prove they are not MSCPs], the floodgates will well and truly open.”

However, “at least by April 5th “the forum user added, addressing PSCs using neither of the firms, “you will have one less year to worry about should your particular accountant be tested later.”

The two firms aren’t the only parties who will likely appeal HMRC’s assessments of course.

‘You have 30 days’

Contractors wishing to fight the assessments have 30 days from the issue date to submit an appeal to HMRC, which effectively is notification by the taxpayer that they do not accept it.

“When raising any appeal, including detailed evidence and rebuttal to HMRC’s position, with reference to the legislation, is your best chance of defence,” WTT Consulting recommends.

“Do this early. You have 30 days from the date of the letter to raise your assessment so do not delay. A request can also be issued to postpone the tax due, stopping it from collection action until the matter is concluded via the enquiry.”

‘Your tax liability does not cover MSC’

WTT’s Mr Wallace further advises that because whether a contractor’s accountant might be deemed an MSCP is “fact-dependent,” otherwise helpful “templated responses” – even if the contractor cites provisions, “may not offer the best chance of success.”

Other advisers say affected contractors should just immediately pick up the phone to their tax insurers as soon as they receive any mention of MSC legislation in correspondence from HMRC or their accountant.

However instances of providers telling contractors, in the paraphrased words of one disappointed PSC, “your tax liability does not cover MSC” are already emerging.

‘Highly questionable HMRC calculations’

Ironically, it might be their accountant who should be an MSC legislation-probed contractors first port of call.

The Association of Independent Professionals and the Self-Employed said: “In the few examples we have seen so far, the amount which HMRC say is due is highly questionable.

“We believe HMRC has rushed out these notices to meet the 5 April deadline and hasn’t properly calculated the tax that would be owed, if indeed it is able to establish that the accountant is an MSCP. In most cases the actual tax bill will be significantly less than stated in the determination notice.”

‘HMRC has made a mistake’

In a statement responding to the HMRC assessments, Churchill Knight said: “Churchill Knight & Associates Ltd believe HMRC has made a mistake, and MSC legislation does not apply.

“Working closely with specialist lawyers, we have submitted a thorough technical response to HMRC explaining why we believe they have misinterpreted the legislation.

“We're actively working with our impacted clients to help them appeal against HMRC's initial determination and have built an informative portal to assist them throughout the appeals process. We will continue to fully support them throughout this investigation.

“If any Churchill Knight & Associates Ltd clients require any information, please use the [dedicated appeals] portal to contact us, and we will get back to you shortly.”

‘Employment tax demands to every contractor using the same tax firm’

Meanwhile, a representative of Boox has been invited to comment.

Having been one of the original stakeholders involved in the February 2007 consultation of the MSC legislation and regulations, Andraste Accounting’s Ms Walsh advised: “HMRC will investigate a few contractors, and when it deems an 'accountant' to be an MSC provider, it hands out demands to every contractor using the same firm.

“If anyone receives an HMRC letter which mentions MSC legislation and includes a tax demand, as the issue lies with the accountancy service provider being deemed to be a MSCP, contractors should be made aware so that they can handle their issue effectively.”

A recipient of exactly such a letter told ContractorUK last night: "My accountants Boox warned me the other day and on Thursday I got a letter from HMRC asking for £1,900 tax due for 2017/18. Boox are fighting this but it could be I have no choice not to pay."

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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