A quick read of the taxman’s Spotlight 67 may not be enough

I told ContractorUK back in March that more guidance from HMRC on the Managed  Service Company legislation was incoming, but it’s only just emerged now, in the form of Spotlight 67, writes former tax inspector Carolyn Walsh, founder of Oblako Ltd.

Reading is just the start, surely

It’s not guidance that will be of much help to any limited company contractor already embroiled with HMRC in an MSC investigation. But it is guidance that contractors are being recommended to read – though actually, I’d go further than that becuse the risk is complex, not casual and not insignificant.

First though, and positively in terms of education, Spotlight 67 shows HMRC is aware of taxpayer misconceptions.

Taxman isn’t pulling punches (as he looks to target intentions)

The guidance pulls no punches stating: “Managed Service Company schemes encourage and enable disguised employment,” and “the payments received by the worker are more than they would have received if all the payments were treated as employment income.”

Contractors and accountancy firms should be aware that this wording from the Revenue speaks more about the intentions of the parties rather than the nitty-gritty of accounting processes. If those two intentions could apply in your current set-up, contractors should consider MSC legislation with as much concern to them -- if not more so -- than the IR35 legislation. 

Things to (more than just) remember

In a section of the HMRC guidance a little inadequately entitled “Things to Remember” the key and relevant criteria for the application of the MSC rules are outlined.

The core message here is that “the driver behind Managed Service Company Provider businesses is to encourage and enable you to work through a corporate structure to gain access to lower taxes.”

It should also be reassuring (to some at least) that Managed Service Company schemes are “mass sold ‘off-the-shelf’ software products — they are not, by default, tailored according to your own circumstances.”

What HMRC says about bespoke tax advisory under the MSC rules

The ‘red meat’ on the bone of Spotlight 67 -- bearing in mind the contractor accountancy firms have been jittery ever since Boox & Churchill Knight came under MSC investigation two years ago, is the bit about “Individuals and businesses using traditional bespoke tax advisory.”

Using only the latter service, “or accountancy services only,” including “the provision of dedicated bookkeeping software” is not within the scope of the Managed Service Companies legislation, HMRC says.

We’re further told “a traditional accountant will” review your circumstances and working practices and then “present you with appropriate compliant options.” Whereas, HMRCs says an MSCP “specifically promotes or facilitates the use of one corporate structure to all its customers.” 

Contractor account vs Managed Service Company Provider

Spotlight 67 therefore helpfully alerts taxpayers to some crucial differences between an accountancy service provider (i.e. a tax agent, accountant or bookkeeper) and an MSCP.

I think I can issue my own bulleted guidance to contractors specifically, based on the Revenue’s bulleted guidance to taxpayers as a whole.

Based on what Spotlight 67 states, I’d say that a contractor accountant will:

• NOT recommend setting up a limited company;
• NOT recommend structuring yourself as an LLP;
• WILL discuss with you IR35;
• WILL use recognised accounting software that can be found in a list of software on .gov.

On the other hand, an MSCP provider WILL:

• simply promote the use of an off-the-shelf product, often but not always via a portal;
• offer a portal which is programmed solely to suggest how the worker/director should distribute company turnover. 

LLPs aren’t immune

Talking of LLPs, HMRC is aware that some agencies are working with providers that promote Limited Liability Partnerships as a way of reducing taxes. Cue, Spotlight 67 stating that “the application of the [MSC] rules is not restricted to just one form of intermediary.”

Related, “multiple worker-shareholder companies, known as composite companies, managed personal service companies and partnerships, can all be used as the intermediary in Managed Service Company schemes.”

In short, all of those structures can lead to a risk of exposure to the MSC legislation. 

Introducing Katie

Where HMRC has been criticised about Spotlight 67 is that it provides only one example of an MSC risk for an unsuspecting taxpayer -- ‘Katie’, a courier driver.

We’re told that Katie found an MSC provider through an internet search, and was attracted by the promise of ‘maximising take-home pay and being her own boss.’  

Another example -- that I can provide and is based on an actual case that I came across this year, is the case of ‘Stephen,’ a consultant surgeon working for the NHS.

The complex but interesting real-world example of Stephen (cont.)

Stephen is prepared to put in overtime to help clear the NHS’s backlog of patients. But the reward for his effort is an unattractive prospect because his HMRC-compliant take-home pay would be mostly eaten up, as he is already paying taxes at the 45% additional rate.  

Enter an employment agency business which charges the NHS an obscene amount to supply Stephen back to his employer on his ‘down days.’ And this agency has links to a provider that encourages NHS workers to effectively accept that their overtime payment is paid via an LLP, which the provider sets up and wholly manages.  

The provider tells Stephen that an LLP is not in the scope of IR35 and, in ignorance, the NHS trust managers accept the provider’s claim. Unfortunately, nobody in the chain is aware that HMRC is already onto these schemes, and that LLPs promoted as ‘a way to maximise take-home pay’ likely fall within the MSC legislation.

In this case, the Managed Service Company rules could be expected to apply to each LLP, and the payments that the NHS makes to Stephen and his colleagues -- who are also LLP members -- should be treated as employment income. 

Hoorah Henry!

Just to provide contractors with a more positive, even reassuring example; meet Henry.

Henry was accused by HMRC of being the director of a Managed Service Company.

Henry found it a stressful experience to be under investigation but with the help of an adviser, Henry eventually received word from HMRC that it was closing the MSC investigation into his limited company.

Although Henry didn’t use bespoke accounting software, he previously worked in banking and, therefore knowing a thing or two about debits and credits, used Excel as an accounting tool. With the adviser submitting this detail to HMRC, it was accepted by the inspector that such usage of Excel was proof that Henry didn’t take centralised advice or follow the advice of a programmed portal. A good result for Henry. And the adviser? Yours truly.

Bell-ringing shouldn’t lead to just reading…

If Spotlight 67 rings any bells and you believe that you may have an MSC risk because you’re a Stephen, a Katie, or a user of an accountancy firm’s portal that tells you how to distribute your profits, don’t just read Spotlight 67 -- ask for unbiased advice from a tax adviser who has expertise in this area. As Henry did, make sure that the adviser has no links to an MSCP. Yet subsequently, if necessary and if advised, strongly consider exiting your ‘arrangement,’ before following the official advice on making a disclosure to HMRC.