Managed Service Companies Legislation – IMPORTANT NOTICE

We have recently received a number of queries from our accountant network and from a number of small businesses concerning the Managed Service Companies legislation.

It appears that HMRC are conducting enquiries into a well-renowned specialist contractor accountancy firm, Churchill Knight. Many clients and former clients of Churchill Knight have received letters from HMRC and protective determinations for tax liabilities that HMRC claim to be due on the basis that Churchill Knight is a Managed Service Company Provider and all its clients are therefore Managed Service Companies (see below for an explanation of this). Churchill Knight claim to have acted for 20,000 contractors, so the magnitude and consequences of these enquiries could be enormous.

Urgent Action Required

Because of the unusual way in which the MSC legislation operates, enquiries tend to be focussed on the alleged MSC Provider but liability is directed at the MSC itself. It is therefore possible that these assessments may have arrived out of the blue for many contractors.

It is imperative that appeals are lodged immediately against any assessments. There are many potential arguments that can be deployed against liability, and HMRC’s enquiries appear to be ongoing.  However, failure to act swiftly and decisively will result in liabilities that are due and payable by the contractor. The MSC legislation has the most draconian debt transfer rules of any tax legislation, with not only corporate but potential personal liability for directors, Churchill Knight’s directors and even any agency personnel who have referred contractors to Churchill Knight.

With this in mind and given the large number of businesses potentially affected, if you, your clients or even any limited company contractors that you engage in your supply chains have received a letter from HMRC regarding the MSC legislation, please contact us immediately to discuss the matter further.  We can appeal, postpone all payment of duties, and help deploy arguments against liability and debt transfer. We have set up a team of consultants specifically to help contractor clients deal with this.

The MSC Rules Explained

The MSC rules are widely drawn and to date only one case (on the substantive matter) has been tested in the courts.

The MSC legislation was intended to take effect where a limited company is managed by an external ‘MSC Provider’ and there is a link between the two. However, in theory it could apply to any engagement model where (and we are paraphrasing heavily):

• the business is mainly providing services of individuals;
• the individuals receive the majority of the amount that comes into the business;
• the individual takes home more than a PAYE worker would; and
• there is a second linked external business (an MSC Provider) promoting or facilitating the use of companies and is involved in the first business.

The definition of an MSC requires that all the above conditions apply to an entity before the entity can be considered to be an MSC. The first three conditions are specifically facts that apply to the business, however, the last condition can be tricky for both HMRC and the taxpayer.

The last bullet point requires that an MSC Provider is involved with the business. The legislation includes a definition of how such an MSC Provider can be involved and provides for five possible conditions of involvement:
The MSC Provider:

• benefits financially on an ongoing basis from the provision of the services of the individual;
• influences or controls the provision of those services;
• influences or controls the way in which payments to the individuals are made;
• influences or controls the company’s finances or any of its activities; or
• gives or promoted an undertaking to make good any tax loss.

The key difference with the second definition is that only one of the five potential conditions need apply for an external business (that is promoting or facilitating the use of companies) to meet the definition of an MSC Provider.

The legislation is certainly drafted widely and if it is considered to apply by HMRC, it is the MSC that foots the bill for any additional tax and NICs due under the legislation.

If the business (as is often the case in such circumstances) is unable to pay the bill, there are specific debt transfer provisions that can also apply under the legislation. This includes a transfer to the directors of the MSC as well as a transfer to the MSC Provider.

Other Action

For those that are not the target of the aforementioned enquiry, it is nonetheless a pertinent reminder that HMRC are proactively prosecuting the MSC legislation. With this in mind, clients that either operate specialist contractor accountancy firms, or clients that are in a supply chain that HMRC may target, should review their arrangements in order to ensure they remain as robust and compliant as possible.  Should you require any assistance in doing so, please contact Chartergates.