Industry in “shock” as unsuspecting contractors handed tax bills for breaching MSC rules
HMRC has sent more than 1,000 contractors tax bills of up to £50,000 and accused their accountancy firm of breaking the Managed Service Company (MSC) legislation – sparking fears of widespread enquiries.
The MSC regulation was introduced in 2007 to stop contractors from experiencing the benefits of operating via a limited company if the business is controlled by a third party – a Managed Service Company Provider (MSCP).
In March, the tax watchdog claimed that specialist accountancy firm, Churchill Knight & Associates, had fallen foul of the MSC rules and as a result sent letters to the organisation’s clients.
If HMRC categorises an accountancy firm an MSCP, then it also deems its clients to be an MSC and will insist that income earned through the business is liable to PAYE tax and national insurance.
After tax, interest and any possible penalties, it could mean a contractor pays up to 40 per cent of their income in tax since the so-called MSC was set up, according to tax consultancy, Qdos.
Churchill Knight & Associates has denied the allegations of breaching the MSC rules and has written to HMRC disputing the findings.
Impacted contractors offered “around the clock support”
Tom Edwards, director at the firm, said: “We believe that HMRC has entirely misinterpreted the MSC legislation, and we strongly deny being involved with our accountancy clients as a Managed Service Company Provider.
“Throughout this investigation, we’re offering around the clock support to our impacted clients and have built an online portal to help them throughout the appeals process.
“Everyone at Churchill Knight is shocked about this investigation, but I don’t feel like it’s an attack on us. It’s an attack on the industry and on contractors who operate their own limited company.”
Andy Chamberlain, director of policy at self-employment trade body, IPSE, also said the news had come as a “shock to the whole sector.”
He added: “It has potentially left a significant number of contractor businesses with substantial liabilities.
“It cannot be stressed enough that these businesses have at no point attempted to avoid paying tax, indeed the opposite is true – by using recognised, specialist accountants, the contractors were actively seeking to be fully compliant.”
Contractors told to pay up to £50,000 within 30 days
According to the Financial Times, letters sent to contractors by HMRC demanded income tax for the year 2017-18 and bills ranged from £14,000 to £50,000 that are to be paid within 30 days.
If a contractor cannot pay the bill, the liability travels up the supply chain meaning accountancy firms, recruitment agencies and end-clients could be impacted.
The taxman also stated that national insurance liabilities will follow and that it is carrying out further enquiries into this area of taxation.
Seb Maley, Qdos CEO, said the financial impact of this could be huge: “With IR35 reform and the Loan Charge wiping out tens of thousands of contractors’ livelihoods, this sector is facing up to what could be yet another threat to this way of working”, he explained.
“Latest developments show that HMRC is not just targeting contractors, but contractor accountants too. It means thousands of contractors could be found to have breached the MSC rules through just one inquiry from the tax office.”
MSC rules likened to Loan Charge but could impact more contractors
“To make matters worse, many contractors would have been advised to operate this way by their accountant – yet still, the contractor will be held liable. In this respect, it bears certain similarities to the Loan Charge, but with the potential to affect more contractors.”
IPSE’s Chamberlain added that it is now up to the courts to decide whether the legislation applies and “we hope common sense will prevail.”
“We have a notoriously complex tax system and most businesses seek professional advice to help them deal with it. They should not be penalised for doing so.”