Lords: MSC laws are a sticking plaster

New laws for Managed Service Companies, IR35 and the small companies' tax hike are legal "sticking plasters" to heal state-perceived cracks in the tax system.

Each successive piece of legislation wrongly attacks "the symptoms not the cause" of the tax system's crucial anomaly - HMRC's varying levies for income tax and national insurance.

The House of Lords has agreed with these verdicts, from leading tax advisors, casting doubt over the effectiveness of the newest "sticking plaster"' – anti-avoidance laws for MSCs.

Its Economic Affairs committee said "no satisfactory long-term resolution" will exist for the tax issues of MSCs, or personal service companies, until the crucial tax disparity is tackled.

But this suggestion from the Lords – that regulations in the Finance Bill 2007 (which is due its second reading this month) will be ineffective against MSCs – has yet to calm industry jitters.

MSC providers are busy telling users that their service will be unaffected by the laws, which levy PAYE & NICs on a contractor's income, as HMRC will exempt them as 'accountants.'

A HMRC spokesman confirmed it is aware of such 'rebranding' – where MSC providers re-badge their service, in a bid to fall within the bill's exemption for 'professional accountants.'

Under the Finance Bill 2007, a person or entity would not be a MSC provider solely for "providing legal or accountancy services in a professional capacity."

Yet if an accountant runs a distinct business of "promoting or facilitating the use of companies to provide the services of individuals, then to that extent they would be an MSC provider."

In an online Q&A to identify what constitutes an MSC provider, HMRC added an accountant who provides tax advice to clients – including incorporation, would fall outside the laws.

Experts at KPMG are warning that the number of MSC providers claiming exemption as 'accountants' or 'lawyers' is sizeable enough to make them the initial targets for the taxman.

Adrian Marlowe, managing director of Lawspeed, yesterday noted a concerted effort by providers to present themselves as fit for the 'professional accountant' exemption.

He told Contractor UK: "Some organisations that are accountants are certainly emphasising their accountant credentials.

"When is an accountant an MSC provider? There are anomalies here and this is the area on which some debate was taking place.

"The general rule is that if they are in the business of promoting or facilitating the use of companies, it matters not whether they are accountants or any other kind of organisation, they will be an MSC provider."

Responding to advertising material put out by these 'rebranded' MSC outfits, HMRC says many still remain 'MSC providers' as defined in the new legislation.

In a recent statement, the department said: "Individuals operating through service companies, particularly those who believe that prior to April 6 they would have been within 'IR35', should consider carefully their and their company's relationship with the MSC provider.

It added: "If a service company is within the legislation and the company fails to operate PAYE, this could result in individuals being held personally liable for the PAYE debts."

HMRC did say that whether or not the new tax rules apply will depend on the "precise relationship between the MSC provider and the client company."

A legal advisor to IT contractors yesterday said the new laws for MSC workers, which promise to transfer their liabilities to 'third parties' if debts cannot be recovered, could compel another party in the contractual chain to make claims about their service.

He said: "Recruiters may be more concerned to avoid the new laws for MSCs but many have less of a clue how to [than contractors].

"It would not surprise me to hear that certain agencies might try to take advantage of the legislation by trying to sell themselves as 'fear-free' to clients because of intrusive 'compliance checks'" into the workers they source.

Separately, James Wilson, of law firm Baker & McKenzie, said of 'rebranded' MSC providers: "The Treasury is determined to clamp down on these arrangements.

"Given the potentially ruinous liabilities all parties face, we feel a conservative approach is the most sensible option. Contractors, agencies and end users should proceed with extreme caution and seek professional advice before dealing with MSC providers claiming to be 'professional accountants'."

Matthew Brown, managing director of Giant group, reflected: "Contractors and recruiters dealing with MSC providers are taking huge financial risks.

"A lot of MSC providers are reassuring their clients that they are fully compliant with the new law, but they are fooling themselves if they think HMRC would introduce anti-avoidance legislation, only to leave a 'loophole' allowing MSC providers to sidestep it by claiming to be 'professional accountants'."

On Tuesday July 17, 2007, the House of Lords will begin its second reading of The Finance Bill, and take into account the findings of its Select Committee for Economic Affairs, which said proposals on MSCs are a "sticking plaster."

The committee has also heard that "further measures" than simply hiking the SCR three per cent, in as many years, may soon be needed to head off individuals incorporating for tax purposes.

And Chas Roy-Chowdhury, head of tax for the Association of Chartered Certified Accountants, blasted the decision to raise the tax rate for small firms in the first place.

He told the Committee: "There seems to be little acknowledgement about the long-term planning requirements of businesses. To fundamentally change the regime without any consultation, without taking account of what the business has already done, is not in the least business-friendly or the right approach."

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