HMRC’s own Spotlight shows its MSC legislation to be bizarre

An update on the Revenue’s roundabout way to obtain national insurance contains warning lights, an unhelpful example and a thought to perish.

So here we have it from HMRC.

If you have your own personal service company and are taking out of it a low salary and high dividend, HMRC thinks that you are working through a Managed Service Company (MSC), and ought to be paying employment taxes, which are higher, on everything that you take out of it.

Well, perhaps not quite — but HMRC’s recently issued Spotlight 67 comes pretty close to saying this, and both contractors and their accountants need to wake up and take action, writes employment tax specialist David Kirk, founder of David Kirk & Co.

What HMRC says in Spotlight 67 and why it’s troubling

Have a look at this:

“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, or partnerships, for individuals to provide their services through.

“This is usually done by promising the individuals an increase in take home pay if they use this model through their service.”

The italics above are mine, for emphasis, but it’s all extracted word-for-word from Spotlight 67.

Aren’t accountants supposed to facilitate the use of your limited company (‘facilitate’ means ‘make easier’)?

And aren’t accountants supposed to advise you how to increase your take-home pay, as far as this is possible?  Warning light number one.

Warning light number two

Next, have a look at this – it’s also taken directly from Spotlight 67:

“Influencing or controlling the way payments to an individual … are made [this is one of the tests of ‘involvement’ with your company that an MSC provider has to have for your company to be an MSC].

“Managed Service Company Provider products may be programmed to suggest how the company distributes profits.  This will typically be the signposting for, or a presumption of a low-salary high-dividend formula. In other words, where most of a worker’s income is from dividends rather than a salary from the intermediary company.’

Again, my italics. But it should speak for itself.  Warning light number two.

An unhelpful example

Then, HMRC gives what it says is an example of an ‘MSC provider interaction with an individual.’

“Katie is told to register a company from which services can be provided. Katie can then start to receive dividends.  Katie is shown how the software will provide the most tax-efficient result once the company is live and providing services.”

You might think that having a portal calculating how much you can take home and how you label it would be both quicker and more reliable than ringing up your accountant, particularly if you also thought that you had chosen a firm of accountants whose senior management had had a good look at the software that they were employing, and so were able to keep some proper quality control over it!

So what on earth does HMRC think it is doing?

A clue can perhaps be found further down Spotlight 67, which gives HMRC’s impression of accountants that are not caught by the MSC legislation:

The taxman takes on what he thinks a traditional accountant does

“A traditional accountant will:

• review your circumstances and working practices
• present you with appropriate compliant options.”

Perish the thought that the above might be what an up-to-date, highly automated accountant might do too!

HMRC says that this framework from 2007 is to prevent “disguised employment.”

The reformed IR35 off-payroll rules have eaten MSC’s lunch

The irony is that they no longer need the legislation to do that.

The new IR35 rules, which pass responsibility for all this on to end-clients, agencies and umbrella companies, take care of almost everybody who might genuinely be in that category.

Moreover having all your takings taxed as employment income no longer increases HMRC’s tax take on your income anyway, as the following table shows (N.B. this does not apply to Scotland):

Not much in it, eh?

But of course there’s a sting in the tail.

Employer’s National Insurance when deemed an MSC costs…

If you’re in an MSC, it’ll have to pay employer’s National Insurance on top of this, as follows:

So here you see it. The MSC law is a roundabout way of getting National Insurance: an anti-disguised employment provision that has no employment status tests, and makes your company a Managed Service Company because of the way that your accountant presents your tax options to you. It’s bizarre.