It would seem HMRC’s assault on contractors has kicked up a gear and contractors who operate through their own Personal Service Company (PSC) now have another worry to contend with. Not content with changing the so called IR35 legislation a couple of years ago, effectively forcing a good proportion of genuine self-employed contractors into umbrella or PAYE employment, HMRC are now using the largely forgotten Managed Service Companies(MSC) legislation to further reduce the flexible workforce that is the lifeblood of many of the vibrant industries in this country.
A Quick History Lesson
Most of you will have forgotten what an MSC is, understandable given they’ve hardly been mentioned in a decade or more. An MSC is (usually) a one-man limited company which has been set up by an MSC Provider (MSCP). An MSC Provider is a company that is in the business of promoting or facilitating the use of companies to provide the services of individuals. The basic idea is that the rules should apply to those who are setting up and basically running the service companies on behalf of workers, who enjoy a largely hands-off experience. This is defined as involvement, more of which anon.
In 2016, HMRC had a success at the First-tier Tax Tribunal in a case against Costelloe Business Services Ltd (CBS). HMRC won this case because it was found that they were an MSCP because of their “involvement” in the businesses of their clients. This was appealed.
In 2019, the Court of Appeal handed down their decision that CBS was an MSCP, and therefore its clients were MSCs.
In early 2022, HMRC targeted Churchill Knight and Boox as potential MSCPs and have raised assessments to both them and their clients.
For the purposes of the MSC legislation, a service provider is involved in its client’s business if:
The provider benefits financially when the worker provides a service (a percentage based fee for example)
The provider influenced or controlled how the worker received their payment (calculating and instructing payments of dividends and salary)
The provider influenced or controlled the worker’s company finances (full access to the bank account, say, or actually making payments from the account)
The provider influences or controls the workers’ services
The provider underwrites any tax losses
Crucially, only one of these forms of involvement needs to be met for an MSC arrangement to exist.
The Accountancy Exemption
It is not automatically assumed that an accountant, even an accountant specialising only in contractors, is an MSCP.
The appeal court observed “an accountant or other support service will not be caught even if some of its customers are PSCs because although in a broad sense it might be regarded as facilitating those PSCs in the running of their business, that assistance is merely a consequence of the services it provides, it is not in the business of doing that.”
Most accountants assist their clients in the running of their businesses. Much of the advice provided relates to tax-efficiency. It would be remiss of any accountant not to assist their clients in arranging their affairs in the most efficient manner. This would often extend to advise the tax efficient “salary” to pay, and how much dividends are recommended or advised. This does not mean that the accountant is an MSC Provider.
We’ve prepared this risk table for you which might help you:
Churchill Knight / Boox
Nationwide contractor-only service provider who have 3,000+ clients
MEDIUM / HIGH
Local contractor-only accountants
Nationwide mixed client accountants
MEDIUM / LOW
Local mixed client accountants
We’re pleased to say that Acumenica fall into the second lowest category. While we have a particular focus on the contractor market, we also have a thriving general practice looking after many other types of business.
Who should be worried?
First and foremost, clients of Churchill Knight and Boox should be paying close attention to this,as these are the primary targets right now. Clients who were involved with some of the larger contractor accounting specialists should also be keeping an eye on the post mat.
If you’re not sure whether your accounting service was potentially an MSCP, here are some of the hallmarks:
You were told to form a limited company by your agent and to deal with this service provider
The service provider raised invoices on your behalf
Your service was “cookie-cutter” in that you had no substantial discussions with them regarding your income and how it should be handled
The service provider had control of your bank account
The service provider’s fee was based on your income – as a percentage for example
The service provider offers a limited company to umbrella and back again option
MSC Debt Transfer Provisions
The MSC legislation contains quite brutal debt transfer provisions. Generally speaking, it is the PSC that faces the potential liability if the MSC rules apply. If the company can’t pay then the next in line is the director. However, if the PSC or its director cannot pay, then HMRC can transfer the debt under the ‘recovery from other persons rules’ in ITEPA 2003 s 688A. The first port of call will be the MSC provider and its directors. If the MSCP can’t pay due to involvency, and there is evidence that a referring staffing agency ‘encouraged or was actively involved in the provision by the MSC of the services of the individual’, then there is a risk that the tax debt could be transferred to the staffing agency and its directors. Although less likely, it is also possible that a hirer could face tax debt transfer if they encouraged contractors to work through PSCs and to use certain advisers to effect this. Everyone in the supply chain needs to be aware of their risk.
If you have any concerns about whether you are likely to be caught, we’d advise you to contact your accountant in the first instance. Alternatively, you can contact Acumenica on firstname.lastname@example.org or 03330 166559 for a no obligation consultation.
There was a time, not so very long ago, where HMRC didn’t issue fines and penalties as a matter of course, and in the rare occasion where one was issued, you could normally ring them up, say sorry guv it was an honest mistake, and they’d tell you to be a little more careful next time, now run along, sonny, there’s a good lad.
Fast forward ten, fifteen years and the average SME can’t turn around without running into another HMRC or Companies House fine. Granted, there are tools that make compliance that much easier now, but still it can be a challenge getting things in on time.
Here is a list the most frequently incurred penalties an SME can face:
Private limited companies have, with a few exceptions, nine months from the financial year in which to file their accounts. Normally, that’s plenty time, but not always. If you file late. you can expect a hefty fine.
1 day to 1 month late £150
1 month to 3 months late £375
3 months to 6 months £750
More than 6 months £1,500
If you’re late two years’ running, the fine doubles. So, if you were one day late one year, and seven months late the next, you’d have a penalty of £3,000 to pay in the second year.
Late filing of corporation tax return
1 day to 3 months late £100
3 to 6 months late another £100
6 to 12 months late 10% of tax due
More than 12 months Another 10% of the tax due
If you can’t be bothered to do the maths (why would you when I can do it for you), that means that if you’re 7 months late and you had taxable profits of £50,000, then your penalty would be £1,150 plus interest.
Value Added Tax
Everyone know you don’t mess with the VAT man right? This aphorism has entered into SME lore, and for good reason. Ignoring for now the difficulties you can get into when you’re the subject of a VAT inspection, the penalties for late filing are eye-watering: If you’re late filing your return once, you get a slap on the wrist and are put into what’s not as a Surcharge Period which last for twelve months. If you’re late again in that surcharge period – and remember a VAT return is not complete unless you also pay the amount due in full, you will be charged as follows:
Default 2 2% of tax due
Default 3 5% of tax due
Default 4 10% of tax due
Default 5 and beyond 15% of tax due
What you pay for late submission of your monthly or quarterly Full Payment Submission report depends on the number of employees you have:
1 to 9 employees £100
10 to 49 employees £200
50 to 249 employees £300
250 or more £400
Everybody knows you’ve got to file your self assessment by 31st January but if you’re just one day late, there’s an automatic fine of £100. If you still haven’t filed 30 days after the 31 January, then the penalty is £10 per day.
These are the basic fines and penalties you can face for non-compliance. If you are unfortunate enough to be the subject of an investigation, then you face a whole new raft of challenges: Daily fines for failure to produce information and fines of up to 100% of any additional tax found due. But that’s another story for another day.
Less than a week after the chancellor confirmed he was pressing ahead with the reforms, the Treasury last night announced that the Off-Payroll reforms – due to come into force on 5th April 2021 – will now be delayed until April 2021.
This means that contractors retain the right to determine their own status and that the liability will not transfer to the end client.
Alan Broome, MD at Acumenica said this morning “This is undoubtedly a big win for contractors but it is only a deferral. Make no mistake, the rules will come into force next year. We, the contractor community, have been given a year’s reprieve and it’s most important that we spend it wisely. Contractors need to engage immediately with their clients and get their working practices in order. All the measures we’ve been recommending for months, which were really essential good business practice anyway, now need to be put in place. We’ve seen from many of the big FS companies’ knee jerk blanket bans over the past few months that they’re not going to help much. Contractors, this time, need to look after themselves. This is what we mean when we say that the time should be spent wisely.”
It may be too late for many contractors, who have already been forced down the PAYE/Staff route, but it would appear that there may be a way back for contractors who chose the umbrella route. And for those who are still operating through a PSC it’s likely to be business as usual. It remains to be seen though, what the end-clients will do. It’s still entirely at their option to refuse to engage with PSCs and they may not fancy the admin task of reversing the decision but we remain hopeful. Maybe a blanket ban will precipitate a blanket u-turn.
It’s also business as usual at Acumenica. We remain committed to Britain’s contracting workforce and we welcome enquiries from clients old and new. For more information and assistance please email email@example.com or call 03330 166 559. Please also keep an eye on our website as we will be providing an analysis of how this will affect our clients, and the wider contracting community in the coming days and weeks.
The way umbrella company or PAYE solutions calculations and illustrations are presented can sometimes (OK, most of the time) be confusing and opaque. We prepared this short video to explain how the calculations actually work. Hopefully you’ll find it helpful.
Last night we presented our final (for now) IR35 reforms webinar. Thanks to all who tuned in tonight and last week and to all who attended the recent live events at Freeagent too. All told, we’ve had a great opportunity to present to in excess of 400 contractors. Hopefully you’re all a little bit wiser for the experience.
Here’s the (badly) edited recording. If you weren’t able to attend, or tune in, this give you a chance to catch up, and if you were, you can listen again. Surely any opportunity to listen to Alan’s dulcet tones shouldn’t be passed up.
We all know that to be considered outside IR35 that you have to satisfy a number of conditions. Chiefly these relate to Direction and Control; Right of Substitution and Mutuality of Obligation. But in addition, other factors are considered. Amongst other things, the question of whether you are Part & Parcel of the organisation you are contracting to, or in business on your own account (IBOYA) is becoming increasingly common.
In recent weeks, I am increasing asked whether a contractors LinkedIn profile would have any impact in a status enquiry. While I do not believe it would be a material factor, and is unlikely to stand up in court, if you are saying on LI that you are “Lead Project Manager at Lloyds Banking Group” rather than “Director at Joe Bloggs Ltd contracted to Lloyds Banking Group on the ABC change project” then at the very least you are going to have one less awkward question to ask.
It’s a small part of a very large jigsaw but establishing yourself on LinkedIn as IBOYA at the very least confirms your mindset.
You’d also be well advised to avoid terms such as “when I worked at” or “I was employed to do X” as these would suggest an employed position rather than that of an independent consultant. Similarly, you’d want to keep an eye on the endorsements and recommendations, to ensure that the language used there is appropriate too.
I must reiterate that this is not a major part of any IR35 defence strategy but is merely good housekeeping and might help avoid unnecessary stresses should HMRC actually coming knocking. Picture the scene, you’ve spent the afternoon asking questions from the badly dressed HMRC agent, then he asks in his best Columbo accent “Just one more thing, you’ve been telling us all day how you’re an independent consultant in business on your own account, yet your LinkedIn profile says your job title is Business Analyst and your employer is Royal Bank of Scotland. Can you explain that?”