When tax liability insurance can be a wolf in sheep's clothing

With the IR35 off-payroll tax proposals, and Loan Charge 2019 in the spotlight, concern about risk and compliance is high among contractors, agencies and hirers, writes Lynne Gowers of Liquid Friday.

To further muddy the waters, last year HMRC won an appeal of the first case brought to tribunal under the Managed Service Company legislation, bringing renewed wariness about what can potentially constitute an MSC.

Whiter than white! Or just worrying?

More than ever, payroll providers, umbrella companies and contractor accountants are falling over themselves to assure people that they are legit and risk-free.

One obvious way some providers do this is by using language like “HMRC approved”. (FYI - claims like this are rubbish; HMRC will never definitively rubber-stamp their approval to an umbrella company or other third party payroll provider.)

A less obvious way that some companies try to infer compliance is by promoting services which are backed by tax liability insurance. This can also be referred to as tax loss or tax mitigation insurance. It sounds reassuring, right? But in some cases, not all, it could be a wolf in sheep’s clothing.

Risk under MSC legislation

The Managed Service Company (MSC) legislation has been around since 2007, to prevent those falling outside of IR35 from incorrectly avoiding tax and NICs through the use of an MSC.

An MSC is a limited company that enables contractors to manage their invoicing and accounting through a composite company scheme. This involves the company being run by a Managed Services Company Provider (MSCP), with several contractors acting as non-director shareholders. The contractors are then paid a low salary and high dividends – avoiding tax and NIC while having no responsibility for running the company.

A contractor found to be falling within the MSC legislation will have their payments reclassified as employment income, subject to tax and NICs. The MSC is then liable for any owed payments.

Crucially, if HMRC cannot recover the tax and NICs due from the MSC, then liability can fall to directors, the MSC Provider, agencies or the end-client.

You may be wondering what this has to do with tax liability insurance but bear with us!

‘Involvement’ with an MSC

One of the indicators of an MSC Provider is that they give or promote a service which makes good a tax loss. This is one of five activities that, in law, makes the MSC Provider “involved” with the MSC.

Where, subsequent to April 2007, an MSC Provider or an associate either offers insurance against the tax/NIC liabilities arising under the MSC legislation, IR35, or indeed any other provision of the Tax Acts or National Insurance legislation, they will be ‘involved’ with those client service companies to which they either offer, or promote, such insurance.

What real compliance looks like

Real compliance doesn’t need to hide behind potentially spurious provisions like tax liability insurance.

Legitimate umbrella companies will always comply with tax and employment legislation, including the deduction of appropriate PAYE tax and NIC, so tend not to have any need for tax liability insurance.

And of course, tax liability insurance does have its place. Yet if it is something your umbrella company is offering, it may be worth questioning why. Could the company be an MSC Provider in disguise?

Tread with caution and to reduce any nasty surprises, we would recommend a company which is a member of the FCSA, in the event that the answers from your existing umbrella don’t satisfy you.

There are also independent experts who you can consult if you’ve got concerns about exposure to the MSC legislation. Right now, all eyes are other pieces of legislation (new, existing and incoming), but a bit like the draft IR35 framework for April 2020, there’s more than one party who can come unstuck under the MSC legislation due to its ‘debt transfer’ provisions. In short, awareness and due diligence are the order of the day, for the sake of everyone the whole way up the supply chain.