Contractors, HMRC just sent new MSC appeal letters demanding 'actual income figures'

The taxman telling Boox and Churchill Knight contractors under MSC investigation that he now requires “actual figures…to revise…calculations of what you owe,” when the corresponding test cases are already meant to be set for February 2026 isn’t going down well, writes former tax inspector Carolyn Walsh, director of Oblako Ltd.

The first thing to make clear to the concerned is that these letters from HMRC are part of a pilot exercise.

Received an MSC appeal letter demanding actual figures? You're part of a pilot group

So only a handful of Boox and Churchill Knight contractors under MSC investigation by HMRC have received the letters, entitled, “Your appeal -- please send us your actual income figures.”

The fact that this is only a pilot exercise may allay the fears of those Boox/Churchill Knight contractors who haven’t received the letters and are wondering why they’ve been left out.

Not that the recipients of the HMRC letters feel like they’re in an enviable position, mind you!

HMRC is demanding salary, expenses, dividends, and pension contribution figures

The HMRC letter seems like a data-grab or fishing expedition, because it asks the ‘MSC contractors’ to provide actual figures relating to salary, expenses, dividends, and pension contributions, if applicable.

To some on the receiving end of these HMRC letters, the feeling is that previous determinations made to them by HMRC under the MSC legislation can’t have been much more than an educated guess, given that the Revenue now wants “actual figures.”

‘Our best judgement from 2022’ versus ‘made-up’ figures

The official line is that because these determinations were made in 2022, they were HMRC’s ‘best judgement’ based on the data that the tax office could get hold of at the time.

Nonetheless, as one ContractorUK Forum user on the receiving end of the letter put it, seemingly a Boox contractor:

“I'm glad HMRC didn't just make it up in the first place!”

What other details are Boox/Churchill Knight contractors being asked for?

In the letters, HMRC states that it needs a breakdown of, broadly, three things:

1. Company turnover, including when each payment was received;
2. A breakdown of expenses to ensure that these were allowable, and;
3. Details of any other payments made to the director or his/her associates (family members, partners etc.) e.g., loans and benefits.

‘We need to revise our calculation of what you owe’

The real rub with the preceding section in the letter before the above trio, which states “we need to revise our calculation of what you owe,” appears to be that the HMRC narrative has no regard for the validity of a contractor’s defence against the MSC enquiry.

And that’s a defence which would have been laid out in their already underway appeal.

What HMRC states in the letters, ‘Your appeal…’

For fuller context, the corresponding section in the HMRC letter states:

“We've previously issued Regulation 80 determinations and Section 8 decisions for Income Tax and National Insurance Contributions (NICs) we think you owe.

“We received appeals against these, and the charges are stood over while we continue with the enquiry.

“These determinations and decisions were based on financial information we hold. I now need actual figures from you, to revise our calculation of what you owe.”

Despite the stress and anger among contractors who have received one of these HMRC letters, I look at this pilot exercise as a positive, not least because it signals that the MSC investigation is in its final stages.

February 2026 is when Boox/Churchill Knight contractors should get their say in court

That makes the whispered-about February 2026 court date for the Boox/Churchill Knight MSC test cases, plausible.

Personally, my hope is that HMRC uses “actual figures” gathered from this pilot to calculate a formula which will determine who is likely to have not used the MSC scheme that was allegedly made available by the accused providers (known as MSCPs).

A case of HMRC double-speak about the MSC legislation?

Interestingly, HMRC has explained the following in a meeting:

'We are aware that genuine businesses sometimes use an MSC scheme [in which case, contractors, the MSC legislation could apply], so it follows that sometimes genuine businesses did not use the MSC scheme, even though a scheme may have been made available to them.' 

Whatever HMRC’s opinion is, there is a feature of MSC schemes which can prove or disprove that opinion -- all of those accused of being MSC providers still have one main concern. And that is to demonstrate that every penny of a worker’s income was accounted for.

Formula, backwards calculations, and a divisible by 12 estimate…

The accused MSC providers devised a formula for that, and consequentially, it has been very easy for HMRC to ‘backwards calculate’ from the accounts of a company under investigation, to an MSC scheme.

Furthermore, HMRC found that many MSC providers produced an estimated annual set of accounts and divided the sum by 12 to provide a monthly pay amount to clients. This calculation will have only satisfied people who were potentially using a limited company solely as a payment vehicle, and therefore wanted to compare the drawings from their company against their expectations under PAYE.

The broader picture is that when a business owner is making his or her own financial decisions, MSC legislation cannot apply. And there may be a way of devising a calculation which will prove this to be the case. It’s basic mathematics, and whether MSC legislation stands or falls, is potentially going to be decided by ‘backwards calculating’ the accounts of each company under investigation.

What you need to do (in just four weeks) - HMRC

Where I’m less sympathetic to HMRC and its letters is the rather tight deadline that they impose on recipients. In fact, under a warning “What you need to do,” recipients are told they have just four weeks to reply with the many details requested.

These MSC-appeal letters are NOT the most deft piece of communication from HMRC. Indeed, HMRC has apologised in private to some of the letter recipients who found the letters confusing. Therefore, a single month to consider, understand, consult, source, and potentially send every detail that the Revenue wants seems unfair.  

If you’re reading this and missed the HMRC deadline to respond (June 27 and July 4 are common cut-offs), there’s no harm in asking HMRC for an extension, particularly if you have a good cause.

Replying to HMRC’s ‘actual figures’ MSC appeal-letter

Wherever you do provide figures in response, performing your own calculations is probably the best course. And assuming you did NOT use the provider’s portal to determine how payments were made by your company, make sure you highlight the way distributions were made alongside each record of the income generated.

All that said, agreeing to provide further details to HMRC might be the ideal stage to strongly consider engaging your own professional, independent advice, in a bid to avoid any missteps, numerical or otherwise.

Here’s just one example of how you might say they ‘wrong’ thing to HMRC in trying to hurry off a reply. In the letter, HMRC wants to know about expenses. But tread carefully because as a director, you are an employee of your company, so are only entitled and limited to the same reliefs as all employees. See here for more details: https://www.gov.uk/tax-relief-for-employees

Also, if you (or someone else) made personal use of anything belonging to the company, make sure to include proof that the tax arising was paid by you, and that the company paid the additional NICs.

Further considerations

Again though, legal representation might seem more prudent than entering into correspondence with HMRC.

However, it’s important to not only give HMRC the correct information in ‘your’ response, but to also use your reply as an additional opportunity to challenge and disprove HMRC’s opinion on the status of your company.

Are these HMRC letters a Trojan horse for an IR35 investigation?

Finally, just a word or two about IR35. The detailed list of what HMRC wants in the letter, and some of HMRC’s choice of words, is giving rise to concerns that HMRC is segueing into investigating the recipient contractors under IR35.

But this isn’t the case. It is the case that a director is entitled and limited by the same PAYE rules as any employee, but that relates only to salary. It’s a kind of fluke that evidencing a lack of Supervision, Direction or Control (SDC) is the test that allows travel expenses to be tax-deductible. A director might have problems proving outside IR35 status if working under direct SDC, but that isn’t the only factor in an IR35 status enquiry, whereas in allowing travel expenses, it is the only factor.

To reiterate, this MSC appeal letter from HMRC demanding “actual figures” from contractor limited companies is not an IR35 enquiry by stealth.

Not convinced? Well, let’s end where we came in -- with the taxman’s own words. See ESM3605 - Managed Service Companies (MSC): MSC Legislation and IR35, which states:

“Where a service company would be caught by Chapter 8, Part 2 ITEPA 2003 [IR35] but also falls within the definition of an MSC, then Chapter 8, Part 2 ITEPA 2003 will not apply as the MSC legislation must be applied instead.”