A number of contractors have received letters from HMRC as a result of their accountants being investigated under the Managed Service Company legislation. What should you do if you receive a letter?
We asked Qdos – a leading tax advisory firm – what contractors should do in this situation, and what to look out for if you’re concerned about whether or not the MSC rules apply to you.
You can read our background article to recent HMRC MSC activity here.
What should I do if I get an MSC enquiry letter from HMRC?
If you are in receipt of a Regulation 80 notice from HMRC you should immediately complete the following three measures:
- Appeal the notice on the grounds that the taxes stated within the notice are estimated and excessive.
- Request the postponement of all additional liabilities shown in the Reg 80 pending the outcome of the appeal.
- Notify your accountant or your tax advisor immediately (an accountant or tax advisor will be able to complete the above two measures on your behalf).
What if I don’t return the Regulation 80 within 30 days, is HMRC flexible?
You can submit a late appeal or postponement application. However, HMRC may reject this appeal – See here for more information about the appeals process.
What evidence should I provide in my appeals letter?
Evidence provided should support your belief that the MSC legislation does not apply to your circumstances.
For example, that all income is taken via PAYE, or that less than 50% of income is taken as dividends (these are just examples and may not relate to your situation).
I don’t provide personal services via my company, but my accountant is being investigated as an MSCP. Am I exempt?
If you do not operate through a Personal Service Company and receive all your income via PAYE, the Managed Service Company (MSC) legislation will not apply.
Still unsure as to where your company stands in relation to the legislation? In order for a company to be classed as an MSC, it must fulfil four conditions.
What if I closed my company in the past? Can HMRC still open an MSC investigation?
Yes, using their “discovery” power they can investigate back as far as 20 years.
I thought accountants were exempt from the MSC legislation, so why are they being investigated?
Some accountants are exempt, however, this is not the case for all. It depends on how they operate and their customer base.
See here for further guidance on exactly who is exempt from the MSC legislation.
What is the link between the MSC rules and IR35?
The MSC legislation takes precedent over Chapter 8 Part ITEPA 2003 (IR35). However, it does not take precedent over Chapter 10 Part 2 ITEPA 2003 (Off Payroll Rules).
Both the MSC and IR35 legislation are designed to tax all dividend income as salary via PAYE.
If my accountant includes business insurance in their monthly service, is this an indicator of it operating as a MSCP?
Not necessarily, to be a Managed Service Company Provider an accountant would have to be “involved” with the Personal Service Company.
Click here to find out exactly what constitutes an “involved” accountant.
Are MSC enquiries included in the standard Qdos tax investigation policy?
Our TLC insurance policy covers the cost of representation in the event of an MSC enquiry. It does not, however, cover the cost of additional liabilities that may result from an enquiry.