It’s time to scrap the MSC rules policing UK contracting. Here’s why.
We believe HMRC’s November-issued guidance on the Managed Service Company (MSC) legislation, Spotlight 67, is a response to the increasing number of complex cases waiting in the wings to be resolved.
However, this isn’t the time for mere guidance updates, but for fundamental legislative reform, writes Crawford Temple, CEO of the UK’s largest independent assessor of payment intermediary compliance Professional Passport.
The outdated MSC framework of 2007 must go
The MSC legislation, once a cornerstone of tax compliance in the contractor market, has become an outdated framework that no longer serves its original purpose.
Introduced in 2007, the MSC legislation was designed to address specific concerns about tax avoidance and contractor compliance.
But the professional employment market has transformed dramatically since then, rendering this legislation not just unnecessary, but actively detrimental to modern working practices — contracting included.
Three big shifts that call time on HMRC’s MSC legislation
Here are the critical shifts that warrant an immediate review of the MSC legislation:
1. The OPW rules
The introduction of the Off-Payroll Working rules has fundamentally altered the compliance landscape.
Most end-clients of contractors are now directly responsible for IR35 status determinations, effectively addressing the primary concerns that originally prompted the MSC legislation.
This shift means that tax compliance is now managed at a much more sophisticated and accountable level.
2. A better taxman and enforcer
HMRC’s enforcement mechanisms have also evolved significantly. The ability to recover debts from end-clients with substantial assets has mitigated previous concerns about companies avoiding tax obligations through closure or bankruptcy.
These enhanced mechanisms make the MSC legislation’s original enforcement approach completely redundant.
3. The technological revolution
The technological revolution in tax management since 2007 – that’s almost 18 years ago — cannot be overstated.
Making Tax Digital (MTD) and advanced accounting software have transformed how contractors manage their businesses.
These technological advancements directly conflict with many aspects of the MSC legislation, creating unnecessary complexity and friction.
Assessing an accountant under MSC rules? It’s nigh on impossible
In addition to these three shifts, and related to the technological revolution, the current interpretation of the legislation (including in Spotlight 67) has become so convoluted that it is nearly impossible for an individual taxpayer to accurately assess an accountant’s status.
Such complexity runs counter to the principles of a transparent and accessible tax system.
A call for clarity, modernisation, and upholding compliance
By the government scrapping the MSC legislation, it could bring much-needed clarity to the tax system. Ministers ought to misunderstand – our call to do away with the MSC legislation isn’t about reducing compliance or creating loopholes — it’s about aligning our regulatory framework with current market and technological realities.
My belief is that the Labour government has an opportunity to demonstrate its commitment to a modern, efficient tax system by listening to industry experts and taking decisive action.
The MSC legislation is a relic of a bygone era, and it’s time we consign it to history.
Finally our recommendation – and message to policymakers…
Our recommendation is this. A comprehensive review of the Managed Service Company legislation, with a strong likelihood of complete removal, should be conducted at the first opportunity. The review should acknowledge that the professional employment market has matured, and our regulatory framework must evolve accordingly.
As an industry leader committed to compliance and fairness, our organisation stands ready to engage constructively with policymakers, HMRC, and others to ensure a smooth transition while maintaining the highest standards of tax compliance.
The message below is simple and I invite policymakers to agree with it or else come forward to explain otherwise:
The MSC legislation is a regulatory relic that no longer serves its original purpose. The government should bin it.