As HMRC tries for new scalps under the MSC legislation, 150 is the magic (yet ominous) number

Around 150 contractor members in a new challenger group fighting HMRC’s accusation that they are Managed Service Companies.

Verus, at the other end of the scale, a warning that as much as 85% of the entire UK contractor accountancy market could be affected, should the Revenue win its MSC campaign against either Boox or Churchill Knight.

We must wait and see to find out which of the two figures will come to more truly reflect the size of the impact that HMRC’s attempt to revive the MSC legislation will have, but all the signs are that the taxman is using the 15-year-old framework to take a firm stand against contractors and their advisers in the accountancy sector, writes Matt Fox of Beacon LLP.

Accusations, weakness and disappointment

As most of us know by now, HMRC sent income tax demands of up to £50,000 to 1,000 contractors in March 2022, further to accusing their two respective accountancy firms of being Managed Service Company Providers. The accusations of HMRC are strongly denied by both firms.

Above, I use the word ‘accusations’ intentionally, because there does appear to be a slight weakness in this coming forward by HMRC, even if the tax department has recently been described as "militant." Notably, the letters sent by HMRC stated that the Revenue has utilised its “best judgement” to come up with the figures.

Disappointedly, no fuller explanation has been provided by HMRC about its attempted enforcement activity. But then, audaciously even, the letters requested the outstanding liabilities due to HMRC (ranging from £14,000 to £50,000) to be paid within 30 days.

Potentially a big impact, at a still fragile time

Despite being seen historically as well-heeled, contractors who get enlisted by our advisory appear to have finances and reserves of a level that indicate such a grab by HMRC could have a substantial impact.

And a substantial impact both on the ability of an individual limited company contractor to continue to trade and on the limited company contractor sector as a whole (even if the comparatively smaller 150 figure mentioned at the outset is the more reflective). This HMRC scrutiny comes at a time for PSC directors when, as I’ve outlined earlier this month, the covid recovery for some single-person companies is still very much ongoing.

What the taxman says...

Officially, HMRC have said that they will look to work with individuals struggling to pay their debts. However, for many contractors, receiving a large tax demand will be difficult to overcome and they may need to seek professional advice and help.

HMRC has stated: “We rightly take action against the use of avoidance schemes, which artificially reduce the tax people owe. Such action follows considerable evidence gathering and expert advice.”

And in a statement probably lifted from their IR35 playbook, HMRC has also said: “People who work like employees must pay tax like employees.”

The department added: “The MSC rules prevent an intermediary company setting up a structure that facilitates tax avoidance.”

The cost to contracting of another Costelloe?

At the time of writing, there is only one piece of MSC-related case law. It relates to a case dating back to May 2016, where HMRC won its case against Costelloe Business Services. HMRC brought the case against the advisory firm and accused it of being an MSCP that encouraged tax avoidance.

Our worry is that, if even just one of these two new cases should proceed and HMRC wins, then there would then be two, albeit different cases which could put pressure on the already overly-legislated contractor sector. Remember it’s been said that 85% of the contractor accountancy market (according to Qdos), could be affected if Boox or Churchill Knight join Costello. It’s the equivalent, according to the FCSA, of some 150 contractor accountancy firms being affected.

Final thought

That high number of accountancy practices that may be hit – each with their own clientele of contractors -- seems at odds with the lower volume of participants in the MSC challenge group – ironically also 150. But nevertheless, the impact is likely to be felt by a considerable number of parties in the sector, especially as the taxman can look to utilise his ‘debt transfer provisions’ if he has no luck extracting what he deems due from the ‘accused’ -- MSCs and MSCPs. There would therefore be a significant impact on the contracting industry, regardless of which 150 figure you favour, potentially making contracting far less appealing.