Why we’re calling for a halt to MSC investigations

But the latest fear among contractors is receiving a letter citing Managed Service Company legislation.

Concerningly, this is the situation facing around 45 IPSE members and up to two-thousand other contractors who have been served eye-watering tax bills under MSC legislation.

At IPSE, we’re extremely worried that these investigations threaten any contractor that uses an accountant – that’s why we’re stepping up our campaigning efforts to halt these investigations until a full review of the legislation is carried out.

It cannot be right that HMRC targets the smallest businesses for engaging an accountant when the principal purpose of using an accountant is to be tax-compliant.

What is MSC legislation and why are HMRC applying it in these cases?

Introduced in 2007, MSC legislation aims to prevent tax avoidance by individuals paying third party ‘providers’ to create and manage bogus companies on their behalf. The rules were backed by industry and were effective at tackling the problem they were designed to tackle.

Until now, it was a scarcely used piece of legislation – other than in the case of Christianuyi v HMRC in 2019, where HMRC were successful in applying the legislation. The judgement was far wider-ranging in its application than many anticipated, and it is thought that HMRC’s success in this case has prompted it to broaden its approach.

HMRC is now using the legislation to target relationships between contractors and accountancy services providers – ones which, for the past 16 years, have been widely considered to be out of scope.

The MSC legislation even exempts the role of accountancy, but it appears that HMRC wishes to test the legal boundaries of this exemption.

In HMRC’s opinion, two accountancy services providers have breached MSC rules and therefore have been deemed a Managed Service Company Provider (MSCP) – a claim they deny but have no means of challenging.

The latest schism within the Conservative Party

On the one hand, you have Rishi Sunak’s ‘pragmatic’ economic approach, grounded in a desire for stability. On the other, you have a growing caucus of Conservative MPs supportive of Liz Truss’s policies to bring about turbocharged growth and lower the tax burden.

Let’s not forget that Conservative members favoured the Truss approach. Rishi Sunak has the unenviable task of trying to appease the very base of his party that didn’t want him only one year ago. It’s this split within the party that is receiving column inches and captivating party members. But it also does nothing to endear the UK’s smallest business owners, who will no doubt be left frustrated by an apparent dearth of ideas to address many of the issues they face.

What happened at the Party Conference?

After days of speculation surrounding HS2, the Conference finally kicked into life with the re-emergence of Liz Truss at a packed-out event held by the Conservative Growth Group. This is a group of MPs – believed to be as many as 60 – that want to see an end to the current fiscal ‘status quo’ by reducing taxes and boosting growth with measures such as scrapping IR35.

At the event, prominent figures such as Priti Patel and Jacob Rees-Mogg stood alongside Liz Truss in calling for radical change to taxation and a desire to boost the UK’s economic fortunes.

But these sentiments are in sharp contrast to the main event; Rishi Sunak’s first conference speech since becoming leader.

Sunak passionately claimed that the Conservatives “will always be the party of enterprise, the party of small business,” although many of the UK’s 4.3 million self-employed will disagree.

Many will point to the imposition of the IR35 reforms – forcing a large proportion into an unregulated umbrella company market – as well as constant raids on dividend income and increases to corporation tax. For others, it will be inaction on late payment, training and skills, or gaps in support during the pandemic. After 13 years of Conservative government, the self-employed arguably feel more marginalised by public policy than ever before.

Sunak’s use of the phrase “it’s time for change” was also particularly interesting. It's curious that a party that has been in government since 2010 is advocating change. It's also curious that a current Prime Minister, with the power to bring about such change, offered no real insight into what this change would even entail.

Whilst we had some detail given on the plans to outlaw smoking and an overhaul of A-levels, there was also a glaring gap in his speech: a plan to support businesses and encourage growth. This would suggest that the PM is actually content with the current economic status quo and at odds with his assertion on bringing about change.

It’s official, the self-employed are deserting the Conservatives

It will therefore come as no surprise that the self-employed are now looking away from the Conservatives.

This sector is often considered to be a naturally Conservative electoral bloc, tending to favour pro-business and free-market policies. Therefore, the latest polling from the Centre for Economic Performance is particularly pertinent, revealing that just 19% of the self-employed intend to vote for the Conservatives at the next election. When the polling was carried out at the same time last year, this figure was 30%.

Instead, these findings now indicate that 36% of the self-employed intend to vote for Labour at the 2024 election, an increase on 34% from last year. The self-employed are also now slightly more likely to vote for the Liberal Democrats, unsure of their voting intentions or not planning to vote.

Ultimately, the polling provides a bleak snapshot for the Conservatives.

Perhaps it’s time they finally recognise the impressive economic contribution and entrepreneurial drive of the sector and embrace the self-employed in public policy. This sector is not only vital to the UK’s economic fortunes but also represents a significant voting bloc at the next election.

Employment income then becomes due on their clients’ earnings – with these clients themselves deemed Managed Service Companies (MSCs).

HMRC appears to have taken an indiscriminate approach to these inquiries, determining all the clients of these accountants to be MSCs before taking any individual circumstances into account.

Why we’re launching our campaign now

We’ve been supporting 45 members that have been caught up in this nightmare and it’s becoming increasingly clear that tribunals could be heard before the end of the year.

We believe it is essential that these investigations are halted until a review of the legislation – and of HMRC’s compliance strategy – is carried out, to ensure that what HMRC is doing is truly aligned with the legislation’s original aims.

We all know that the tax system is notoriously difficult to navigate. HMRC should not be increasing these challenges by pursuing those who seek expert advice from specialist accountants in their efforts to be tax-compliant businesses.

How you can help

This is where you come in. We’ve asked you to write to your MP before on issues such as IR35, and many of you have – thank you. It would help us enormously if you would do so again, as MPs are chiefly concerned with what their constituents are saying.

Join the campaign to halt ongoing MSC investigations and download our template letter.

We will keep on pressing Ministers in the Treasury, backbench MPs and government officials about the need to halt these investigations. We will also continue to support our members with the help of our partners at Markel Tax.

For more information on what to do if you’re caught up in the MSC investigations, we’ve put together an MSC advice hub on our website. IPSE members will also be able to access a template appeal letter.

If you are not yet an IPSE member, please be advised that you won’t be able to access the tax investigation insurance if you join us after you receive the Regulation 80 determination notice.

Please let us know which MP you have contacted by emailing [email protected] so we can follow up with them.