Chancellor, it’s the MSC legislation which your Autumn Statement 2023 should reform

To the chancellor of the exchequer before he speaks on November 22nd, I wish to say that the reform we really need announced would address inequities in tax laws, with the effect of creating a fairer business environment in contracting while ensuring continued access to essential professional advice, writes Anthony Mellor, founder of Mellor & Co.

At the time of writing, as economic certainties seem as controllable as the British weather, my call to you, Mr Hunt, is for reasoned action within the labyrinthine world of tax legislation. Notably, the Managed Service Companies (MSC) legislation -- it’s a framework from 2007 with critical implications not just for contractors and their advisers, but for our national interests.

Chancellor, contractors be like this…

The contractors in question are our nation’s intellectual titans. These are independently employed individuals at the zenith of their fields, often serving at the heart of our greatest enterprises and most secure national defence institutions. From what I’ve seen, contractors are fought over by our best enterprises, our security-sensitive organisations or departments, and they go into these workplaces across the UK with none of the props of permanent employment to fix, develop, produce or provide what others cannot.

To confine these unique workers within the torturous bounds of the current MSC legislation isn't just inequitable -- it's a risk we can ill-afford to take as a nation.

Doubly disproportionate

And it’s all because the wording in the current MSC framework not only ensnares our best and brightest in a web of complexity, but it has also driven their most valuable advisers into the shadows for fear of personal liability. In short, legal, tax and accounting experts dare not get “involved” -- as the MSC legislation puts it, for fear of personal liabilities due to the framework containing transfer of debt provisions.

In particular, as HMRC states: “Where an MSC is unable to pay its PAYE and NICs liability, its debt can be transferred to third parties.

“These include the company’s directors, the MSC Provider, and in certain circumstances, other third parties. Where the PAYE and NICs debts of an MSC cannot be recovered from the company, HMRC may transfer the debt personally to one of the following: the company’s director; the MSC Provider; other third parties.”

The taxman’s MSC provider examples aren’t helpful, other than for his PR

Further according to the tax department, the following are (rather unhelpfully in my view) identified as an MSC Provider:

1. A firm of accountants carrying on a discernible part of their business specifically to market and/or provide corporate solutions and services to individuals providing their services to end-clients. (N.B. In this case the firm would only be a MSC Provider in respect of that discernible part of the business).
2. A business which terms itself a Tax Advisor, service provider, or whatever but which specifically market and/or market corporate solutions and services to individuals providing their services to individuals.

To the chancellor, I’d say this -- the second example is as convoluted as it is impractical while the first example is a red herring. Collectively, the examples give HMRC plausible deniability which is useful for their PR purposes, but of little or no usage to us advisers.

Spooked

For accountants and lawyers, the fear-factor of falling foul of the MSC legislation (and effectively being deemed by HMRC outside the specific exemption for persons being MSC providers merely by virtue of providing legal or accountancy services), is so severe, that contractors are today being deprived of essential professional advice and services that they both need and are entitled to.

So advisers who are crucial for guiding our leading freelancers through the maze of tax obligations and business decisions are in effect, spooked, because the MSC legislation is overkill.

Reds & Greens

To Mr Hunt’s Treasury, I would say that while HMRC guidance categorises matters as what we advisers call either ‘reds’ (indicative of MSC) or ‘greens’ (indicative of non-MSC), the 2007 legislation lacks definitions, necessitating reliance on standard English definitions.

This is problematic because where UK law does not contain definitions of terms, then a standard dictionary is to be used. So, any absence of definition can lead to unlimited breadth of the effect of a clause.

Even where there is definition in the MSC legislation, HMRC easily navigates around those in court. In practice, this ambiguity breeds fear and uncertainty among professional advisers, who are reluctant to offer their expertise for fear of personal liability under the MSC legislation.

The shelter for us advisers from MSC exposure isn’t effective

Putting advisers in a state of professional fear is wrong and the apparent “exemption” for them in the legislation is not effective. That’s largely because to have any “involvement” makes this MSC law apply. And anything -- just anything -- can be claimed by HMRC to be an “involvement.”

Chancellor, I’d implore you to remember the fledgling entrepreneurs and small business owners who find themselves mired in MSC complexities they didn't even know existed, until they are embroiled in them! Deprived of professional advice due to advisers' fears of personal liability, under the transfer of debt provisions, they're hamstrung from day one. This isn't just a hindrance -- it's an affront to future innovation and excellence.

What the MSC legislation ought to look like

What we need with Managed Service Companies is a balanced framework that fortifies compliance yet frees entrepreneurial dynamism and guarantees access to professional advice without fear of reprisals. A review or overhaul of the MSC regulations would be welcome on November 22nd. I’d go so far as saying it’s an urgent national imperative.

Mr Hunt, it’s only proper that you create an environment as chancellor where our brightest minds can freely tap into the expertise they need to excel, and where advisers can offer their essential services without the sword of Damocles dangling over them.

The future success of our country depends not just on the skills and talents of our top contractors, but also on the quality and breadth of the professional advice they can securely access. To compromise on this is to gamble with our national prospects and undermine our intellectual capital.

Autum Statement should make a start on MSC reform

So I respectfully urge you, chancellor, to use Autumn Statement 2023 to begin a re-examination of the Managed Service Company (MSC) regulations and related tax provisions that inadvertently hinder law-abiding individuals from accessing essential professional advice and services.

It is my belief that these regulations, while well-intentioned in the first instance, have had unintended, unplanned consequences. They have led professional advisers to exercise extreme caution, retreating from offering their invaluable guidance, lest they inadvertently cross the extremely vague line drawn by these regulations.

Finally, MSC rules are a brush too broad to be retained without amendment

Chancellor, the core issue is that these MSC regulations in their effect deter contractors from seeking and receiving professional counsel -- a fundamental element for informed decision-making and compliance. My hope is this isn’t a consequence intended by the authorities. It’s true to say there are cases brought under MSC legislation where tax officers have valid concerns, but usually these issues are very clear, with lay people able to spot then easily from the off. However, the current approach wields a brush too broad, discouraging the very support that ordinary individuals, lacking in professional expertise require, to navigate the complex world of taxation and business generally.