Taxman axes MSC audit scheme

Calls for HM Revenue & Customs to adopt an audit standard to help industry identify what constitutes a managed service company (MSC) have been officially rejected.

They were made on behalf of third parties to service providers, like recruiters, fearful that engaging the provider may land them a tax bill under the MSC transfer of debt rules.

Under the rules, which take effect from Jan 6, any party who "encourages or is actually involved" with a contractor working via a MSC could, in some instances, be liable for unpaid employment debts.

Last month, HMRC admitted that auditing providers to see if they met a standard outside of the criteria to be a MSC could clarify if parties who engage it will escape tax demands.

But yesterday tax officials told Contractor UK that, as currently framed, the standard is unworkable in the immediate term and may, in the future, be "abandoned entirely."

A spokesman for HMRC also said: "[Our] lawyers have expressed doubts that the MSC Audit Standard, in the form it was being developed, was within HMRC's legal powers to implement."

Adrian Marlowe, managing director of Lawspeed, which met with HMRC to consult on the standard, said the proposed structure was intrinsically flawed.

"There were serious questions about the legality of any scheme for a number of different reasons, some technical and some practical," he said.

"With regard to agencies in reality the only advantage of an audit scheme would be to guarantee that they are not liable for MSC contractor tax if they refer or recommend to an audited provider.

"Since HMRC could not agree to that for legal reasons, the idea of an audit scheme was always going to be of doubtful benefit."

Accountancy firm JSA initially endorsed the standard, but warned that it might have served to 'severely limit' the choices contractors have in the marketplace.

Barry Roback, chief executive, estimated a cost of £100,000 for HMRC to audit a single provider's business model, suggesting "only the largest providers" would have afforded accreditation.

Speaking before HMRC abandoned the standard, he agreed with a legal expert who questioned the real-world effectiveness of such a standard .

"Unless the government can unequivocally guarantee that dealing with an 'audited' provider will protect an agency from debt transfer," Mr Roback said, "its value is questionable."

Yet with no audit standard, he believes agencies (and other third parties) just play "a guessing game" by resorting to legal notes to assess whether the MSC operates lawfully.

But the legislation's accompanying guidance , which has no place in law, is worthy of close consideration, Lawspeed is advising service providers' third parties.

"In fact HMRC has issued some helpful guidance that agencies can rely upon," Mr Marlowe argued.

"Where a contractor's company already exists at registration with an agency, the agency is unlikely to be liable if the company turns out to be an MSC. Also an agency cannot be liable if it recommends a candidate to an umbrella company that pays only by way of employment income."

In all other circumstances, agencies seeking to avoid MSC tax demands were advised not to make referrals or recommendations of providers, and seek professional advice if in doubt.

Next month's enactment of the debt transfer rules is already creating a lot of doubting agencies, according to Roger Sinclair, legal consultant at Egos Ltd.

"I am seeing agencies asking questions," he said, "which appear to be designed to give them some reassurance against the impact of the MSC legislation, but which in fact show that the agencies asking the questions don't in fact seem to understand the legislation itself".

Yesterday, HMRC declined to comment on agencies being unprepared for the debt transfer rules because they were relying upon a now-redundant audit scheme to bypass them legally.

However, the tax authority did say it will continue consulting with the recruitment sector and service providers to seek their views on how best to proceed with three options.

The department said it could take further legal advice on how far the MSC standard is outside its powers; revise the standard to meet legal concerns or "abandon the concept… entirely."

If the second option is taken – namely redraft the standard to meet lawyers' concerns - it is possible the new standard "may not provide the assurance stakeholders are seeking," HMRC warned.

"Whichever course is adopted," a spokesman added, "HMRC will continue to publish guidance to provide as much clarity as possible."

But one expert on the MSC legislation said the onus isn't on the tax authority to act, it's on the industry, particulalry given the debt transfer provisions are incoming.

Kate Cottrell, founder of Bauer & Cottrell, a legal advisor to IT contractors, also believes that whether or not HMRC develops or implements an audit standard "is really a side issue."

She told CUK: "[There is] absolutely no reason for any provider involved in this industry to sit back and wait and see.

"The Debt Transfer rules are due shortly and no doubt HMRC are preparing to target those providers that they have been monitoring since April 2007. Contractors, agencies, end-clients, acccountancy service providers and umbrellas should all have been actively reviewing their own positions to ensure compliance with the new legislation and protection of their own businesses."

Dec 18, 2007

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