MSC laws 'made VAT delays worse'

Her Majesty's Revenue & Customs has blamed the increasing delays to VAT registration on the new tax laws for managed service companies.

Asked yesterday why the average time taken to process VAT applicants is now 38 days, three times the 14-day target, HMRC reportedly cited the controversial MSC legislation.

Although the main cause of the VAT backlog was "extended checks on some businesses as part of our attempts to reduce fraud," the anti-avoidance laws had played a part, HMRC said.

"There has also been a spike in applications because of changes to the tax regulations for managed service companies," said a spokesman for HMRC, The Independent reported.

The MSC regulations, which were unveiled in December 2006, effectively treat users of managed service companies as employees, by levying PAYE tax and national insurance.

The new rules would have the effect of forcing MSC workers, who want to avoid these employment taxes, to adopt limited companies which typically register for VAT.

Such was the prediction of leading advisors to IT contractors speaking to Contractor UK on the evening the MSC laws were announced.

They said workers who want to optimise their income (by sourcing it through dividend payments) would simply sidestep the MSC laws by 'going limited' and registering for VAT.

If more evidence were needed that there would be a stampede to register for VAT, Companies House said in March that it had noted a four-fold increase in applications.

Last week, the leading accountancy body said 'the VAT waiting list problem' has got worse because HMRC began more rigorous checks on applicants without "adequate resources."

Evidencing the claim, the Institute of Chartered Accountants in England & Wales said HMRC has reduced the number of VAT registration units from four to two.

But yesterday a spokesman for HMRC reportedly said this would only lead to "slightly fewer people" working on applications. He added streamlining would reduce delays in the long run.

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