Why nobody is safe with a Managed Service Company Provider in the contractual chain
All contractors, accountancy service providers and indeed all involved in the contractual chain need to act now to mitigate risks from HMRC’s focus on the MSC rules, writes former tax inspector Kate Cottrell, founder of status specialists Bauer & Cottrell.
We do not know what has prompted HMRC’s investigations under the MSC rules but now is the time for some ‘due diligence’ and to prepare for the possibility that many others may be in the spotlight.
With the potential under the MSC legislation for any identified debt to be transferred, no one in the contractual chain can say “we are safe” and have no concerns -- unless they have documentary evidence to back such a claim.
The MSC rules have always been there, but it seems they have often been overlooked.
Prior to the MSC rules, we saw numerous accountants doing everything for a contractor, including operating bank accounts, invoicing, and even providing tax losses insurance!
A great service if you can get it (!), but it’s one that did nothing to help contractors to demonstrate they were ‘in business on their own account’ -- a fact that is also extremely useful to being outside IR35.
Professional qualifications and MSC influence
Again prior to the MSC rules, anyone qualified or not could offer accountancy services to contractors.
Post-MSC rules, and thanks to the exemption from them for those professionally qualified, we saw numerous providers simply engage the odd qualified accountant and then they carried on as usual. This exemption has never been tested in the tribunals and courts.
Many commentators hold the view that accountancy providers undertaking IR35 contract reviews, and in particular assisting with contract clauses and negotiating terms, amounts very clearly to “influencing” the way in which payments are made to the individual, demonstrating that the provider is an MSCP (Managed Service Company Provider) caught by the rules. This has resulted in many providers and agencies steering clear of IR35 assistance.
Tax losses insurances
The MSC rules apply if the MSCP “gives or promotes an undertaking to make good any tax loss.” Similarly, this is untested in the courts and tribunals, but many commentators are rightly wary of the word “promotes” and while it seems fine to signpost their contractors to legal defence insurances, blatant promotion of “no risk to you” tax losses insurances is a very big no-no.
Agencies and end-clients
Many agencies and end-clients are unaware of the MSC rules and the risks of transfer of debt.
We can reveal here that we hear constantly of backhanders being paid to agencies for recommendations to use particular accountancy providers and/or umbrellas and also of end clients with preferred supplier lists, which are based on lucrative relationships rather than adequate due diligence. Now is the time to review all to mitigate any risk.
Whether you have received an MSC legislation-related letter from HMRC or not, you should check out the MSC rules and how they can affect you.
You should consider gathering evidence now so you are prepared. Remember ‘knowledge is power,’ and the taxman is clearly on the front foot.
Received an MSC letter from HMRC? Here’s what to consider
- This is not just about the tax. Just like IR35, the NIC bill will be the biggest one -- with both Employee and Employer NIC due where dividends have been paid.
- Many contractors have been in touch with a relatively small assessment and are mindful to ‘just pay it.’ HMRC does suggest that they can give an estimate for the National Insurance owed, but contact your accountant for this information first.
- The HMRC letters to date cover just one year (2017/18), so if you have been or continue to be with the same accountant, you need to know the potential liability you could be facing.
- The key to your defence is demonstrating that you are fully aware of all your responsibilities when running a limited company, and that you call the shots controlling your finances and making decisions about how much and in what form you paid yourself. Gather the evidence.
- Make a note of the extent of advice you receive from your accountancy provider. See the potential red flags above regarding IR35 negotiations and tax losses insurances.
No HMRC letter received – no worries?
- This is an extremely worrying time for all contractors and a very good time to prepare. Start off by asking your accountant to confirm in writing if they are currently under investigation by HMRC for breaching MSC rules – or ask them of any other aspect that could affect you if they ever have been probed by HMRC. Remember, the two MSC cases we know of have been going on for at least three or four years.
- Establish your liabilities for tax and NIC for the entire time you have been with a particular accountant.
- The key to your defence (whether you need one at this stage or not) is to gather the evidence to demonstrate that you are fully aware of all your responsibilities when running a limited company, meaning with your finances and how much and in what form you paid yourself, you alone were the decision-maker.
It's all about the right mindset
A good starting point is to consider that the day you started your limited company, is the day you made a positive decision to start your own business.
This will be difficult mindset to switch onto for any contractor forced to operate through a limited company (such as many BBC presenters), but it follows that if you think like a business – as opposed to someone turning up for a wage, you then act like a business, taking on all that it entails.
Now is the time to look closely at your contracting history including contracts and exchanges with us advisers. Make your own decisions and always keep any evidence that supports your position.