It’s unclear if the taxman’s guidance can contain the MSC fiasco, or will just end up pre-dating more ‘contractor accountant’-type investigations.
New HMRC guidance on Managed Service Companies (MSCs) and MSC Providers (MSCPs) is hard not to read through the lens of two contractor accountancy firms that we already know are being unpleasantly probed under the legislation, writes Tyra Ali, consultancy manager at Markel Tax.
The context is contractors under a current MSC investigation
So here, exclusively for ITContracting.com, while I’ll assess Spotlight 67 and how well it details the characteristics of MSCs and the relevant tax rules, I’ll do so with the experience of contractors who used two specific contractor accountant firms (and now find themselves accused by HMRC of being MSCs), front of mind.
Released by HMRC on November 21st 2024, the “Guidance” document highlights that the MSC rules are designed to ensure fair taxation by preventing the artificial reduction of income tax and National Insurance Contributions (NICs) through corporate structures.
Traditional accountants v MSCPs
Spotlight 67 also clarifies the difference between traditional accountancy services and MSC providers.
HMRC makes clear that it perceives the latter to specifically promote or facilitate the use of a single corporate structure for all PSC clients to achieve lower tax rates.
As alluded to at the top, about two years ago MSC rules caught many contractors off guard, when HMRC cited these 2007 regulations as applying to them. Made in writing, those citations caused confusion and worry.
We now know that hundreds of contractors got accused of being caught by the MSC legislation, in what was probably the first time many directors heard about the legislation, let alone be supposedly caught by it for using one of the two similarly accused accounting providers.
The MSC fiasco (cont.)
Spotlight 67, labelled by HMRC as “guidance,” comes a little late for these few hundred contractors, and for the two firms. For both these parties, the uncertainty is ongoing.
Whether this new guidance will help others not get embroiled in the MSC fiasco is less clear-cut, because there are at least five fundamental issues with it.
Five areas where HMRC’s Spotlight 67 could be better
1. The guidance on ‘involvement’ is ambiguous
The guidance provided in MSC Spotlight 67 appears somewhat ambiguous, particularly regarding what constitutes “involvement” by an accountancy provider.
This lack of clarity makes it difficult for contractors to confidently determine whether their arrangements might be classified as an MSC.
The examples given by HMRC unfortunately do not clearly differentiate between legitimate accountancy services and those that might lead to MSC classification.
This ambiguity will certainly create confusion and uncertainty for contractors not currently under HMRC investigation, but who are trying to comply with the rules. To that end, the implementation of best-practices to navigate the complexities of the MSC legislation is not a task that Spotlight 67 will become the ‘go-to’ resource to achieve.
2. The guidance is biased towards antiquated accountants
The guidance from the Revenue appears to favour traditional accounting practices over more modern, automated solutions.
This regretful bias from HMRC can be problematic for contractors who use contemporary, tech-driven accountancy services, as it implies that these more ‘with it’ services are more likely to lead to MSC classification. In today’s tech-driven world, achieving this balance may be challenging.
3. The guidance is lacking MSC criteria
Despite it making lots of mentions of Managed Service Companies, Spotlight 67 does not appear to contain any detailed criteria for what exactly constitutes an MSC.
This absence of information will make it challenging for contractors to ensure they are not inadvertently falling into this category, leading to potential tax liabilities and penalties.
4. The guidance doesn’t speak to the MSC-accused
Spotlight 67 includes some steps contractors can take and the resources available but it does not fully address the support available for contractors who find themselves in dispute with HMRC over MSC classification.
5. The guidance doesn’t simplify the complex sufficiently
The new MSC guidance from HMRC has been unveiled — we presume — to assist and simplify the MSC legislation, as in the past the framework has been notorious for overwhelming contractors and others unfamiliar with tax legislation, who have wanted HMRC to simplify the language.
But the guidance still fails to achieve this. Providing more straightforward examples for taxpayers could have made the framework less opaque and more accessible.
Good luck identifying ‘compliant’ and ‘genuine’ in the real-world using just Spotlight 67
Standing back from the detail, we’re forced to the unfortunate conclusion that the rules and examples provided by HMRC in Spotlight 67 could still be open to interpretation, leading to taxpayer uncertainty.
The provided examples are not clear. Using plain English to outline ‘compliant’ arrangements and ‘genuine’ accountancy practices could have provided a more balanced perspective — and helped contractors understand how to structure their engagements correctly.
Where Spotlight 67 could be better
We believe Spotlight 67 should have emphasised the risks of relying too heavily on advisers, and we say that as an advisory to contractors ourselves!
The ongoing investigations into two specific contractor accountancy firms highlight the importance of contractors remaining actively involved in their compliance efforts.
But HMRC’s November guidance does not stress enough that anyone encouraging contractors to set up a company could be deemed an MSCP and might be setting the contractors up as MSCs.
How to keep the MSC legislation from biting
Contractors should take proactive measures to ensure MSC legislation compliance, such as:
- conducting thorough due diligence when selecting accountancy providers;
- maintaining detailed records;
- seeking professional advice to supplement their compliance understanding and activities;
- allowing for regular audits/reviews of business practices, as these can help identify and address potential compliance issues early on. These audits/reviews ought to be run by accountancy firms too.
We should reiterate that contractors should remain actively involved in their compliance efforts and not rely solely on advisers. This includes understanding the implications of the MSC legislation and taking steps to mitigate its risks.
HMRC could do with some MSC guidance of its own
It is not just taxpayers who have their learning cut out, however.
The ongoing investigations into the two accountancy firms highlighted major issues with HMRC’s approach to enforcing the MSC legislation.
At the time of writing, we understand has HMRC has selected a number of MSC cases to be joined and heard as ‘test cases,’ including those involving the two firms.
The outcome of those will be crucial in determining the future application of MSC legislation, with Spotlight 67 likely to pale in comparison. Indeed, this guidance hasn’t even been included in HMRC’s official manuals.
Spotlight 67? It’s a rehash of what we already know
Spotlight 67 merely reiterates HMRC’s existing stance with the use of some questionable illustrative examples. As a result, key areas remain where the guidance could have been made a lot stronger and more helpful.
The taxman should understand that such improvements could have helped contractors navigate the MSC legislation more confidently and effectively.
Given that the complexities and potential pitfalls of the 2007 framework have therefore only been touched upon, and far from cleared up by Spotlight 67, it’s sensible that contractors seek professional advice to inform their own individual efforts, activities and strategies to ensure the MSC legislation is kept far at bay.
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