Managed Service Company tribunal inches closer

Managed Service Company (MSC) legislation continues to be a problem. For the approximately 2,000 contractors caught up in the current investigation, it’s a huge problem. It hangs over them and their business and threatens their future.

For every other limited company contractor that uses an accountant, it’s a problem waiting to happen. And for the accountants themselves, particularly those that specialise in providing services to contractors, even a mention that the MSC rules might apply has the potential to destroy their client base.

That’s why we have already written to the new Treasury Minister responsible for HMRC and the UK’s tax policy to make sure our campaigning on this continues where it left off with the previous government. With the help of our members, we had managed to get the attention of the previous Financial Secretary, Nigel Huddlestone. He had met with our CEO and had promised a further meeting to discuss the issue. Frustratingly, the election got in the way but we are determined to make progress with this new government.

Tribunals edging closer but very slowly

There has been some progress too with the current cases, but the pace remains outrageously slow. More than two years after the first letters went out to contractors, we finally have the first indication from the tribunal that the test cases are inching towards being heard – but we’re still probably at least a year away from an actual hearing on the central question, ‘are these companies MSCs?’

What we do have is plan to hold a case management hearing sometime between October and March. This hearing will sort out who needs to do what and by when and it may set a date from the actual tribunal (though it may not).

Supporting IPSE members

At IPSE, we are still running our regular Q&A sessions with all of our affected members – our most recent one was earlier this week. Our colleagues at Markel were on hand to answer questions from members and provide us with the detail of the tribunal process.

HMRC’s position

At it’s core, this investigation is about two accountancy service providers – Churchill Knight and Boox – and whether, as HMRC is arguing, they are in fact Managed Service Company Providers (MSCPs). If they are, it would indicate that their clients – the contractors – are managed service companies, but the two don’t necessarily follow, especially if the contractors can prove they are ‘separate from the heard’, and made their own decisions.

Churchill Knight and Boox have argued from the beginning that they are not MSCPs. And the IPSE members have argued that, even if the accountants are MSCPs, they are not MSCs. It’s a complicated and messy case.

The contractors’ perspective

All of the IPSE members say, as far as they are concerned, they were merely using the services of an accountant. Ironically, they were doing so because they wanted to make sure they paid the correct tax. They were shocked to find HMRC accusing them of non-compliance when they had engaged professional services to ensure the exact opposite.

You can read the account of one IPSE member involved in this MSC nightmare here.

What’s on the line?

If HMRC are successful in establishing that the contractors were managed service companies, it will mean that employment taxes are due on any income derived via the accountants, over several years. For many this means a tax bill that runs into the tens of thousands of pounds.

The test cases will involve the accountancy firms and a handful of their clients. The outcome of those cases will impact the fate of all the other contractors involved. Similarly, it has the potential to impact every contractor that uses an accountant if HMRC are successful in their interpretation of the MSC legislation. We firmly believe that it cannot be right that our smallest businesses are targeted for trying to be tax compliant and we will continue to make this point to HMRC officials and government.

It looks likely that the test cases will include some IPSE members, though nothing is decided yet. These IPSE members are benefitting from IPSE’s £100k Tax Investigation Cover and around the clock support in dealing with HMRC from both IPSE and our tax partners, Markel. If any IPSE members do end up at tribunal, we will be there to support them.