Effects of MSC legislation on accountants and contractors.
The managed service companies legislation was introduced in 2007, and brought with it a number of hurdles for those in the contracting industry to overcome. A spike in HMRC activity came many years later, however after the widely reported Costelloe Business Service case had reached its conclusion, it seemed HMRC’s focus was elsewhere and MSC activity died down.
That is until 2022 when hundreds of limited company contractors unexpectedly received tax determinations from HMRC; For a number of years prior, HMRC had been considering whether two accountancy services businesses (Churchill Knight and Boox) were in fact managed service company providers (MSCP).
The effect of which being, that if they are MSPCs, and further conditions of the legislation are met, then the contractors using the MSCP’s would be managed service companies (MSC and liable to tax and NI is due on all sums not already subject to PAYE).
It has now been 2 years since HMRC’s initial spate of determination letters and many accountants and contractors remain uncertain of what will happen, what the far reaching implications may be.
We are currently defending several contractors currently under HMRC scrutiny. While it's impossible to guarantee or predict with absolute certainty what lies ahead, our experience from assisting contractors when HMRC first applied the legislation from 2016-2019, provides some insights into potential upcoming events such as dealing with the aftermath of debt transfer.
What has happened so far?
The action taken by HMRC in raising determinations has been extensive, highlighting significant concerns about the department's apparent lack of resources. Contractors frequently report disjointed communication, estimated liabilities, and a general lack of coordinated efforts.
Our observations reveal that HMRC's fact-finding has been minimal, primarily relying on generic documentation and promotional materials from providers rather than thoroughly examining individual contractor operations.
This means many contractors find themselves no further along than they were two years ago, albeit now with additional liabilities, interest, and penalties accruing for those under appeal.
What’s next?
This primary issue (whether the MSC legislation applies) will need resolution by the Tax Tribunal. Currently, HMRC has chosen a number of cases to be combined and heard as “test” cases. The selection process has been complex and delayed. It's highly probable, though not certain, that two "test" cases will proceed: one regarding engagements with Boox and the other with Churchill Knight.
For a test case to be heard, HMRC must demonstrate common facts and legal issues among selected cases. HMRC's rationale for a test case is not overly clear – for the most part it seems to be simply that some contractors were further along in their appeal journey within the Tribunal than others and that is the reason for selection.
The Tax Tribunal has yet to confirm the suitability of a test case, with a case management hearing likely to be schedule prior to the MSC Appeal Hearing.
Once it has confirmed a test case, it is likely, considering there are multiple contractors and differing advisors, that the next steps to set out directions for a hearing will be lengthy and intricate, to ensure fair treatment for all parties. The first MSC appeal is unlikely to be heard before late 2025.
What will be argued?
Every contractor, and their representative, will have slightly differing grounds of appeal and we have seen a number of points raised including pension contributions, HMRC's lack of thorough investigation, potential offsets, and MSC legislations interaction with other laws.
While it is understandable that parties may wish to argue these points, in our experience when dealing with complex legislation such as this, it is often preferable to keep matters as simple as practically possible. The points raised above become moot if contractors aren't deemed an MSC.
What should be argued?
Overall, three potential arguments exist:
- There is an MSCP and an MSC, but the MSCP wasn’t involved with the contractor’s company. Previous rulings leave little room for success here.
- Accountants aren’t inherently MSCPs if they solely offer professional accounting services. This argument could hold potential, especially with contractor evidence, However, it is not an exemption, a third party can still be an MSCP even if only part of its activities involve promoting or facilitating the use of companies for the provision of services of individuals.
- There is no MSCP. If no such entity exists, contractors bear no liability.
This is by far the strongest argument in law, however what constitutes “promoting” or “facilitating” has not been defined by the courts. It will be interesting to see how the Tribunal will weigh HMRC’s assertion that use of online portals for accounting purposes equates to facilitation (especially in the context where HMRC itself, outside of the legislation, advocates for digital tax processes).
When will we have an answer?
Without the benefit of a crystal ball it becomes very difficult to predict, however we anticipate a hearing in late 2025 and a judgment by mid-2026. Almost certainly, however, the losing side will appeal the decision and if there is then a subsequent appeal to the Court of Appeal it could be that we do not see a final conclusion until 2030.
Should I be doing anything now?
For accountants who have contractors caught up in the current HMRC proceedings, it is very much a waiting game but be sure to respond to any further HMRC correspondence, determinations or county court writs within the timescales to avoid any unnecessary complications.
For accountants themselves there are wider implications. HMRC’s focus is on two companies who were both registered accountancy practices providing accountancy services to PSCs. If HMRC are successful this could have wide reaching implications for all accountants providing similar services. If we consider that the initial spate of determinations that were issued in 2022 related to a period 4 years prior, it means that how an accountancy practice is currently acting now will almost certainly be in scope for determination when the current appeals have been concluded.
We would therefore encourage any accountant which markets a package of services to PSCs, or who specialises in providing services to PSCs, to look at their marketing literature and engagement letters to ensure that they do not fall foul of MSC legislation or HMRC’s target, as it is abundantly clear that HMRC do not consider that operating as an accountant is sufficient to hold you outside of the legislation.
If you would like to discuss MSC legislation in more detail then please contact us directly at contractorsolutions@markel.com.