How Boox’s ‘MSC contractors’ should deal with an HMRC Standstill Agreement
They are in front of Boox contractors right now and so it’s fair to deduce that Churchill Knight contractors opened them this morning -- or will open them tomorrow if they haven’t received them already.
But what are ‘Standstill Agreements’ by HMRC, asks former tax inspector Carolyn Walsh of Oblako Ltd, and do such agreements matter or can they simply be ignored, and; binned?
Well, in circumstances where the tax paid in a certain tax year might be incorrect because of a “careless error” or “deliberate error,” the time period that HMRC has to complete its enquiries is six and 20 years, respectively.
Taxman’s NICs recovery window is fixed at six years
But when trying to recover National Insurance Contributions (NICs) from taxpayers, HMRC has a fixed six-year period from when the NICs should have been paid.
That goes some way to explaining why in its current MSC investigations, HMRC has started sending contractors offers for them to enter into a ‘Standstill Agreement’ -- largely to protect HMRC against the six-year time limitation.
What advantage does an HMRC Standstill Agreement have?
The benefit to the taxpayer of a Standstill Agreement is solely the avoidance of court fees on top of any potential tax liability.
And so, some advisers may advise against agreeing to such a request from HMRC.
When Standstill Agreements become defunct
Remember that, if on appeal it is found that MSC legislation does not apply to the taxpayer’s company, there are no tax and NICs due, so the Standstill Agreement would become defunct. Similarly if HMRC doesn’t complete its enquiries within the set time period or a reasonable time period on further appeal, the agreement also becomes defunct.
Therefore, if MSC legislation doesn’t apply or HMRC fails to bring the matter to a close in time, entering into a Standstill Agreement doesn't affect the outcome. On the other hand, if it turns out that MSC legislation does apply, a refusal by a contractor to enter into such an agreement may prove to be horribly detrimental to the outcome.
Cut-out and pass on -- to those concerned by IR35 or 70% penalties
The following, easy-to-share notes highlight the severity of the HMRC action that is underway, and the upshot is that action needs to be quickly considered, if not promptly taken by affected contractors.
- HMRC may complete its enquires within six years but has up to 20 years where there is a ‘deliberate error’ on the part of the taxpayer.
- MSC legislation leads by default to a failure to pay the correct amount of PAYE (tax and NICs) which is automatically deemed to be a ‘deliberate error.’
- Where a taxpayer was an agency worker in the relevant tax year, or where HMRC considers that IR35 applied in the relevant tax year, HMRC considers the use of an MSC provider to be a deliberate action, knowingly undertaken to avoid paying PAYE, either as an agency worker or under IR35.
- As HMRC is gearing up to extend the period of its enquiries beyond six years, it is clearly deeming the cases, if proven, to be cases of ‘deliberate error’ on the part of the taxpayer.
- Unpaid tax/NI due to a deliberate error incurs up to a 70% penalty (in addition to any interest that has accrued), on top of the taxes owed.
- The penalty is reduced by a number of percentage points depending on the willingness of the taxpayer to comply and communicate with HMRC throughout the action being taken, so refusing to agree to a Standstill Agreement or ignoring the Standstill Agreement could negatively impact the contractor in terms of any amount owed.
Why contractors need to be psychics
HMRC is currently inundating contractors affected by MSC enquiries into Boox and Churchill Knight with pages of its opinion and legal jargon, while itself not responding to requests for information and proper guidance on the MSC legislation.
It almost seems like contractors are expected by the taxman to be psychics. First; to have worked out who the ‘wrong’ type of accountants that they ought to have avoided were and now, to try to fathom what HMRC is doing or what HMRC might be thinking, in light of this failure by the department to reply to queries from affected taxpayers (presumably because anything said by its officials may prejudice the matter).
Finally, enter or be liable…
Clearly not fancying his own chances at telepathy, one contractor turned to ContractorUK’s Forum instead: to ask: ‘It sounds like we need to enter into these Standstill Agreements, otherwise we could be liable for additional county court fees?’
Well yes, and to reiterate my opinion -- contractors do have to enter into these agreements, because to not enter them, will indeed probably incur court fees and a CCJ.
More positively, taxpayers who ‘help’ HMRC complete their enquiries will have any penalties reduced if the original appeal is lost. There's no need to do anything else if you’re a contractor who has already filed however, as the original appeal will cover both the tax and NICs elements.