Contractors bear the brunt of MSC tax laws
As the MSC legislation approaches its first anniversary, a closer look is needed at the process of a contractor's limited company being deemed a Managed Service Company (MSC).
Much has already been written on the legislation and its meanings, but experts say too "little focus" has been on the contractor – their company or personal assets, having to stump up employment taxes under the law.
It is widely expected that HMRC's approach to compliance will be to assess the providers of services against the MSC legislation, as opposed to targeting contractors' individual companies.
This approach would allow HMRC, in one instant swoop, to catch all the companies that are obtaining services from that provider, in the event that the tax demand cannot be met by the primary parties.
But who are these primary parties? Or, put another way, who is first in line for NIC and PAYE tax demands when the Revenue decides the MSC legislation applies?
Experts say the question needs asking. Not only have "difficult" terms from the Revenue obscured an instant understanding of who's liable and in what order, there has also been a preoccupation with the 'debt transfer' rules.
Kate Cottrell, founder of status advisory Bauer & Cottrell also said: "The emphasis throughout the industry has been put on the transfer of debt [rules] and the impact of [them] on agencies and end clients… - the fact that the contractor's limited company is the first port of call for unmet liabilities has been lost."
Speaking yesterday, HMRC confirmed that the transfer rules only take effect when a contractor's debt of employment taxes "is irrecoverable from the managed service company" – the contractor's limited company, within three months.
Before the rules can be applied, "the first person to be considered [for MSC tax] will always be the director of the managed service company- in most instances that will be the worker/contractor," a spokesperson for HMRC said. Other officer holders or associates of the MSC would, following the contractor, then be considered as potential transferees, the spokesperson said.
Crawford Temple, a director of compliance advisory Professional Passport, condemned the hierarchy whereby contractors are top of the recovery list – their company first, their assets second.
"Contractors have only seven days to pay and their status of being first in line for MSC tax demands has been underreported," he said.
"Contractors need to be clear that factors like a lack of understanding, provider reassurances of compliance, or evidence showing that they did their best to ascertain the compliant nature of the offering are not valid reasons for appeal. No consideration of these factors would be taken into account by HMRC."
Temple says he has "pressed" the taxman to consider such factors, among other things that could help contractors caught by the MSC legislation.
"I believe that contractors should be given a right to appeal on the grounds that they took demonstrable action in trying to accurately assess the compliant nature of the offering.
"[But] at the same time as issuing a notice to the contractor," he reflected, "HMRC is likely to also issue a notice to the provider."
The Revenue testified to this dual approach: "Although HMRC must always consider the director of the Managed Service Company and other officer holders or associates of the MSC, first, in practical terms HMRC will consider both these and the MSC Provider/directors/associates simultaneously".
The department also explained that such a twin focus ensures that "time" is not "lost in transferring the debt to the second group of persons."
Under the law, an unpaid tax debt would be transferred to the company that provided the MSC, its director, office holder or associate of the MSC provider. The final category of potential recipients of the demand includes recruitment agencies and end-clients.
All these parties can appeal against the debt transfer notice but must do so within 30 days. The appeal has to present legal arguments as to why the company was not, or should not, be considered as an MSC.
These arguments can only be made in direct reference to the MSC legislation. Any appeals would be considered by the Special Commissioners
But some in the contractor sector are asking whether further transfers of the contractor's tax debt, beyond the contractor's limited company and the contractor's assets, are actually likely, in practice?
Perhaps so, particularly for newcomers to IT contracting. Yet doubt remains over how much of a contractor's tax debt will actually be left to pay by second and third parties, once the Revenue gets around to issuing them a transfer of debt notice.
"Contractors operating through their own limited company tend to operate at the higher levels of income and as such will have assets that can cover potential liabilities," said Mr Temple.
"As it is the contractor who is always first in line for the debt payment, there is a possibility in the early years that providers could be left with little if any liability."
He also told CUK that he is lobbying HMRC to change the MSC legislation, especially around the order of liability: "It should be the provider that is the first in line for any debt. The provider is offering a commercial service, making a profit from that service and so should be fully responsible for its compliance.
"There is a real threat to contractors that in the early years, some providers could knowingly offer solutions that are non-compliant, in the belief that their exposure is limited," Mr Temple said.
Other industry captains say they will just 'put up' with the current framing of the legislation, but believe more support or guidance for its first potential victims – contractors – should be made available.
Ms Cottrell, a former tax inspector, said last night: "I expect that there are many contractors out there who jumped from the frying pan into the fire post-April, in that they left what they thought would be an MSC provider only to land straight onto another provider who they thought was not one.
"We are seeing many agency contracts which require the contractor to confirm that they are not an MSC, but it is clear that there is little support at the moment for the contractor who, as [with] IR35, will bear the brunt of this legislation."