Proactivity, the one certain step to take for appealing PSCs investigated under MSC legislation

HMRC’s latest activity on Managed Service Companies, which has seen two Accountancy Services Providers (ASPs) come under its spotlight, has left many contractors feeling uncertain as to their position, but there certainly are implications for them and potentially other parties too, writes David Harmer, associate director at Markel Tax.

In simplistic terms the MSC legislation says that where a Personal Service Company (PSC) operates in connection with a third-party business which promotes or facilitates the use of PSCs for the supply of individuals -- and that third party business is “involved” with the PSC, then the PSC is liable to tax and NI on all monies paid to the individual of the PSC.


While HMRC’s main focus is squarely on the ASPs, the impact directly affects the contractors who utilised their services. Under the MSC legislation, the liability to tax and NI sits with the contractor and establishes an IR35-like deemed payment on the PSC which means in the event HMRC are successful, contractors will be faced with a bill to pay, not the ASPs. 

The MSC legislation does carry with it transfer of debt provisions. However this transfer can only be effected if HMRC considers, in respect of monies owed,  that there is “no realistic prospect of recovering …within a reasonable period”. 

Involved, untested -- but exempted?

The MSC legislation only bites where there is a MSC provider (MSCP) which is also “involved” with the business. (Please note, I will not add to the detailed explanations provided on this area, previously by others, but contractors ought to read up if they are unsure). The primary defence, therefore, must be that the ASPs in question are not MSCPs; i.e. they do not carry on a business of promoting or facilitating the use of companies.

The legislation is largely untested. The only previous MSC case, Christianuyi, involving Costelloe Business Services won’t provide a great deal of assistance. There, the tribunal  was not required to determine whether a MSCP existed, as Costelloe simply accepted that they were. The case concentrated on whether they were also “involved” with the business. 

From the information currently available to us, it seems the specific ASPs in question may seek to rely on, in part at least, the oft-dubbed “accountancy exemption”. The specific legislative provision 61 B 3 states: A person does not fall within subsection (1)(d) merely by virtue of providing legal or accountancy services in a professional capacity.”

This provision, however, does not give an outright exemption for accountants. It simply states that providing accountancy services in a professional capacity will not automatically bring a company within the definition of MSCP. An ASP providing more than accountancy services could be a MSCP.

Crossing the line

Untested in the courts and open to speculation, it will be extremely interesting to see whether the provision of online ‘portals,’ packaged services and automated processes (all designed to make a contractor’s life more simple) are deemed by a tribunal to cross the line between accountancy provision and being an MSCP.

Contractors have found HMRC’s enquiry into these ASPs daunting. For some, the first knowledge they had of an enquiry was when they received the protective Reg 80 determination from HMRC for unpaid tax!

Advice on how to deal with these determinations is not consistent, although it should be clearly stated -- there is no one, proper way to deal with these determinations.

Our guidance for MSC-accused contractors

Conversely, HMRC’s quite set and singular opinion is that all PSCs were treated the same by the ASPs. In an ideal world, therefore, we believe that every PSC should submit its own unique appeal letter (independent of the ASP), to demonstrate that it is not ‘one of the pack,’ thereby placing pressure on HMRC to deal with their determination on an individual basis.

In the real-world though, this is not practically possible. If a contractor instructs a professional adviser, then that adviser will likely use the same appeal letter for all PSCs it is acting for. Some advisers advocate simply appealing the determination and waiting; others advise a pro-active approach of informing HMRC that the PSC will wish to undertake independent review once a final conclusion is rendered.  

Fundamentally, appeal

Based on our extensive experience and success rate of winning cases both in and out of the tribunals on IR35 and status, we would always advocate taxpayers take the most pro-active stance with HMRC. While this may be tactically advantageous, it doesn’t of course make it the only ‘correct’ method, and it doesn’t make the advice of another adviser ‘incorrect.’ The fundamentally important thing for contractors at this stage, which all advisers agree on, is that an appeal should be made.

Currently, only protective assessments have been issued for the 2017-2018 tax year, but this will not be the only liability due. HMRC needed to issue these Reg 80s before they became time-barred (typically after four years). 

But keep in mind, HMRC have six years to raise the NIC determinations for the same period, and these will be of a greater value than the tax determination already raised.  If HMRC is successful they will seek to assess tax and NIC liabilities for all periods following 2017-2018 in which the PSC was still connected to the deemed MSCP. It is vital, therefore, an appeal is made.

Next steps

As with the Costelloe case, we expect a number of PSCs engaging each ASP to be selected as test cases at tribunal. We believe that in respect of one of the HMRC-probes ASPs, this is already being considered. Be aware, there is no obligation for any PSC to become part of the test case -- but without PSCs, a test case cannot happen! 

Further, PSCs hold the liability and are the appellants. The ASPs do not have a determination of liability currently – the liability cannot be transferred to them until it has been determined on the PSC (after all appeals are exhausted), and HMRC consider there is no real prospect of recovery from the PSC. Only then, can HMRC raise a transfer of debt notice to transfer the debt to either the MSCP or director of the PSC.

Once a PSC receives HMRC’s “final conclusion” on the matter as to its MSC liability, its only options are: i) seek independent review; ii) proceed to list at tribunal, or iii) accept liability. 

Separate yourself from the herd, and other final considerations

We would advocate seeking independent review first, not least of which because this will give the PSC opportunity to consolidate arguments, demonstrate independence from the ASP and separate itself from the herd

Once independent review is concluded, and in the event HMRC is still of the opinion that MSC legislation applies, the PSC would have to list appeal at tribunal if it wanted to continue with appeal. At this stage it would be recommended that a stay of proceedings is applied for (effectively saying to the tribunal we wish to stay proceedings until the test case has been heard). This will effectively place the appeal on hold until the test case has been concluded.

How tribunals are going to determine these two cases brought under the largely untested MSC legislation cannot be guaranteed; indeed, it’s a big unknown. The legislation has not been fully tested in respect of what constitutes a MSCP and to what extent accountants can rely on the “exemption”.  For contractors caught in the midst of these enquiries, we would strongly recommend seeking independent expert advice and above all, get that appeal in to HMRC.

Profile picture for user David Harmer

Written by David Harmer

David began his career with Markel Tax at 18 and has since spent 10 years with the business, completing a law degree and working his way through the ranks of tax consultant to director. Defending tax payers against HMRC challenges on all areas of contentious tax law including IR35, self-employed status, CIS, agency legislation etc., his tribunal victories include the well-known Sherburn Aero Club case.
Printer Friendly, PDF & Email

Contractor's Question

If you have a question about contracting please feel free to ask us!

Ask a question