Contractors, don’t be fooled by HMRC Spotlight 67 on MSCs

Very much not an early Christmas present for limited company contractors, HMRC on November 21st 2024 published a ‘Spotlight’ on Managed Service Companies.

Spotlight 67: overview

The new guidance explains how the legislation works and goes on to provide an example of what HMRC considers a typical example of a Managed Service Company (MSC).

So far so helpful (potentially). But the Revenue’s update shows that this legislation -- introduced in 2007 -- is drafted extremely broadly.

In other words, it could apply to an awful lot of contractor companies, writes Andy Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed.

The uselessness of example when it’s atypical

The one example by HMRC provided in Spotlight 67, we at IPSE believe, is a clearcut MSC.

Yet, problematically, it is not at all typical of the businesses that HMRC are actually targeting today under the MSC legislation. We think this example could lull many contractors into a false sense of security about the nearly 18-year-old legislation, when they may actually be at risk.

In short, don’t be fooled. In fact:

Company directors must remain wary of MSC legislation

If you operate through a corporate structure, such as a limited company, we recommend that you read the new guidance carefully.

N.B. I use the word ‘guidance’ informally; it is not official legislative guidance, but rather general guidance.

HMRC is actively enforcing the MSC legislation, and for those caught up in the investigations, it’s nothing short of a nightmare.

The case for change: why MSC legislation needs reform

We’re helping around 50 of our members appeal very large tax bills that stem from HMRC asserting that their businesses are MSCs.

There are around 1,500 additional contractors similarly impacted.

All of the businesses we have spoken with were completely shocked to find that they could even be considered an MSC, which speaks to why we feel so strongly about the need for the MSC legislation to change.

With Spotlight 67, HMRC is testing the boundaries

Spotlight 67 from HMRC explains that:

“To be a Managed Service Company, a business defined as a Managed Service Company Provider needs to be ‘involved’ with how the service company itself operates.”

It goes on:

“Managed Service Company Providers are businesses that, although they generally offer accounting services, are in the business of promoting or facilitating the use of limited companies…for individuals to provide their services through.”

Phrases like “involved” and “promoting or facilitating” can be applied very widely.

In the current cases that we are aware of, there are two accountancy service providers that HMRC has deemed to be Managed Service Company Providers (MSCPs) and, as a result, it has sent all their clients huge tax bills.

Questions – and Answers

Were the accountants ‘involved’ in their businesses?

Did they ‘facilitate’ the use of those companies by helping them with tax compliance?

Probably the latter answer is ‘yes’.

But does that ‘yes’ answer (to helping with tax compliance) make them a tax avoidance scheme? In our view ‘No.’

It absolutely shouldn’t do, but the MSC legislation leaves just enough room for uncertainty that HMRC decided to pour considerable time and resources into testing its boundaries.

The flawed example of ‘Katie’

Despite the flaws in the legislation, Spotlight 67 on the MSC framework does a reasonable job of explaining what it is and how it works.

The problem, though, is that the example used would have you believe that only those who more-or-less deliberately set up an MSC will come under HMRC’s glare.

In the example, “Katie” is a courier driver who decides to take up an offer from a provider to set her up in a limited company and effectively run it for her. This is nothing like the real-life examples of the IPSE members we are helping. Most of them already had their limited company when they engaged their respective provider for accountancy services.

Experts seeking experts

Tax is complicated -- too complicated.

Contractors are often very good at what they do, be that project management; cyber security consulting, software development, graphic design and so on.

But that doesn’t mean contractors feel confident in doing their own bookkeeping and tax returns.

The bitter irony, and the danger of Katie

It is a result of being a specialist in tech, AI, digital, security or graphic design but not a specialist in tax that they turn to an accountant for help, and on matters of taxation they will frequently accept the accountant’s recommendations -- just as their contractor clients do in the workplace.

Yet that doesn’t mean contractors are not in control of their company -- and it doesn’t make them tax avoiders.

The bitter irony is that, out of those we’re supporting, they were all actively seeking tax compliance when they bought these services.

The danger of “Katie,” (the example given in Spotlight 67), is that anyone reading it may well say to themselves “That’s nothing like my business, this legislation doesn’t apply to me.”

But HMRC might not see it that way.

We’re campaigning on behalf of the limited company sector

It’s been over two-and-a-half years since the approximately 1,500 contractors were written to by HMRC.

They’ve been under a cloud ever since. The tax bills are typically in the tens of thousands of pounds. HMRC interest is accruing (at a rate which recently went up, as I wrote about last month).

We think the first tribunals might take place in the second half of next year, but it could be later and whatever the outcome, it’s likely to be appealed. This is going to take several years to be resolved, one way or another, and IPSE will do everything we can to achieve a positive outcome for contractors.

Finally, ignore Katie, think about your own relationship

But if you are reading this and you’re thinking this legislation doesn’t apply to you, please do a closer read of Spotlight 67. Ignore the example. Think about your company’s relationship with its accountant, especially if it’s a specialist accountant that services contractors. There’s nothing particularly unique about the two accountancy service providers targeted so far. Until there’s a change to the legislation, the taxman's net could easily be cast wider.