If HMRC determines that an accountancy services provider is in fact a Managed Service Company Provider (MSCP), this means that HMRC believes that the accountancy services provider carries on a business of “promoting or facilitating” the use of companies to provide the services of individuals and that the accountancy services provided is also “involved with” that company (see below: “What is a Managed Service Company Provider”). As a result, HMRC could subsequently determine that potentially all limited company contractors of that MSCP are now Managed Service Companies (MSCs).
Under the legislation, earnings for the MSC for the affected tax year are then treated as employment income, resulting in the contractor becoming liable to pay outstanding income tax and National Insurance on those earnings – regardless of whether the engagements of the MSC were outside IR35.
We outline the scope of the legislation, actions that can be taken for those affected, the likely next steps in HMRC’s enquiries and what this could mean for other accountancy providers and their company clients that could be caught up in this.
What is managed service company legislation?
The legislation was introduced at the 2007 Budget as part of anti-avoidance law within the Finance Act. The aim of the legislation was to prevent a company structure where a group of shareholders can own and run a company as a service provider and benefit from the way in which payments are made and avoid employment income tax on every payment for a service provided.
Until now, it has been a scarcely used piece of legislation other than Christianuyi Ltd & Ors v Revenue & Customs where HMRC were successful in arguing that Costelloe Business Services Ltd was an MSC Provider. This judgement was far wider-ranging in its application than expected and it is believed that its success in this case has prompted HMRC to start further enquiries, albeit its progress has been delayed by Covid.
What is a managed service company provider?
For a person or a company to be considered an MSCP under the legislation, they must be deemed to be “promoting or facilitating” the use of companies which provide services of an individual (explained below) and be “involved with the company”.
In order to be considered to be “involved with the company”, the legislation outlines that an MSCP meets any one of the following conditions:
- Benefits financially on an ongoing basis from the provision of the services of an individual
- Influences or controls the provision of these services
- Influences or controls the way in which payments are made to the individual (or associates of the individual)
- Influences or controls the company’s finances for any of its activities
- Gives or promotes an undertaking to make good any tax loss
A company structure where all payments for services are not treated as employment income, alongside third party management of the company’s payments and finances and direct involvement in the company (e.g. automatic collection of monies due to HMRC or acting with direct authority from the contractor) could result in HMRC determining an accountancy services provider to be an MSCP.
What is a managed service company?
The legislation outlines that a company is an MSC if it meets ALL of the following conditions:
- The company provides the services of an individual to other persons
- Payments are made to the individual (or associates of the individual) for the provision of the services
- The way in which those payments are made would result in the individual (or associates) receiving more than would be due if employment income tax was applied to each payment for services
- There is a “promoter” or “facilitator” which also meets one of the five conditions outlined above.
Should your company be determined as an MSC, employment income and National Insurance contributions would be due for the relevant tax year – regardless of the IR35 status of these engagements.
Who is excluded under the legislation?
The legislation states that accountants are not a MSCP if they are merely providing accountancy services in a professional capacity. Likewise tax and legal advisers that provide advice to clients that happen to be service companies are not MSCPs if they are simply providing professional advice.
However, where an accountant/adviser strays too far outside of its professional remit of providing services and step into “promotion” or “facilitation” of companies for the provision of services of individuals they could become a MSCP.
How do I know if my company is affected?
HMRC has four years after the end of that tax year to recover unpaid tax and issue a determination notice that a company can be determined as MSCP and that their company clients are MSCs.
For the tax year 2017-18, HMRC had until the 5 April 2022 to issue a determination that your company was a MSC for that tax year. Similarly, for the tax year 2018-19, HMRC has until the 5 April 2023 to issue a determination that your company was a MSC for that tax year.
Your accountancy services provider may communicate with you that they have been determined as a MSCP. It is likely your company will receive a Notice of Regulation 80 determination letter from HMRC.
This determination letter issued to your company will explain that your accountancy services provider has been determined as a MSCP for a certain tax year and as such your company, now considered to be an MSC for that tax year, owes employment income tax and National Insurance.
In March 2022, HMRC sent out Reg 80 determination letters to over 1000 contractor companies, following an investigation into two accountancy service providers, deemed by HMRC to be MSCPs.
Many of these letters have been in the form of protective determinations hastily issued in the first quarter of 2022 to avoid any tax due in the 2017-2018 tax year falling ‘out of time’ for collection on 6 April 2022. In the letters, HMRC state they have not concluded their enquiries, and should it be determined the MSC legislation doesn’t apply then the determinations will be vacated. Nevertheless, these letters must NOT be ignored and it is very likely HMRC will go through the same process again towards the end of the current tax year to ‘protect HMRC’s position’ for 2018/19.
A small number of IPSE members are amongst those who have been contacted.
If you are unsure if your company is affected, you can contact your accountancy services provider or if you are expecting but have not yet received a determination letter from HMRC, you can write to HMRC to check on correspondence.
What do I do if I receive a Regulation 80 determination letter?
If you receive a Notice of Regulation 80 determination letter, you have 30 days to appeal from the date of the letter against HMRC’s determination that your company is a MSC.
You must appeal against the determination otherwise you will be accepting the liability for the unpaid employment income tax and National Insurance for that respective tax year.
Appeals should be sent to [email protected].
HMRC should then acknowledge receipt of this appeal before the 30 day deadline to appeal. If you have not heard back from HMRC after submitting an appeal, we recommend you re-send the appeal letter and send a follow-up query asking if they have received the appeal before the 30 day deadline.
How can IPSE support you?
IPSE members will receive a template appeal letter, outlining that you disagree with the determination notice and that you fall outside of the scope of the MSC legislation. Members can access the template appeal letter by logging in to the IPSE website and visiting the MSC hub here.
Members can also contact [email protected] on receipt of a determination letter and we can support you with advice, regular Q&A sessions with all affected members and information about how your membership will protect you from the next steps of HMRC’s enquires.
In addition to the insurance position for all IPSE members, IPSE Plus members will also benefit from the tax investigations service if HMRC request documents under HMRC’s information gathering powers from your company prior to an assessment being raised. The tax helplines for all members offers advice for this matter and any other tax or legal enquiry.
Join IPSE today to ensure to take the right steps in any HMRC investigation.
What are the next steps in HMRC’s current MSC enquiries?
HMRC will now be seeking to prove, with test cases of MSCs, that the two accountancy services providers were MSCPs and were “involved” with the MSCs and can thus be determined as a MSCP.
IPSE recommends that if you have received a determination letter, that you begin the process of gathering all correspondence with your accountancy services providers, contracts and other evidence that may support your case. For instance, it would be beneficial to gather information or correspondence that indicates that you were in control of your company’s finances and the way payments were made for the relevant tax year.
If HMRC are unable to establish that the accountancy services providers are in fact MSCPs, the liability for all the employment tax due in the determination letters will go away.
However, should HMRC be successful in proving that the accountancy services provider is in fact a MSCP and that your business is a MSC, the liability becomes payable.
At this point, IPSE Plus members will benefit from tax and legal advice and we can assist you in fighting HMRC’s determination that your company is a MSC, if you have a legitimate case.
Why is the calculation of tax owed in the determination letter misleading?
From the example determination notices seen by IPSE, the amount of unpaid tax which HMRC say is due is highly questionable, with figures often inflated and not accounting for the offsetting of tax already paid.
We believe HMRC has rushed out these notices to meet the 5 April deadline for the tax year 2017-18 and hasn’t properly calculated the tax that would be owed.
In many cases the actual tax bill could be significantly less than stated in the determination notice and IPSE members will be able to benefit from support and legal representation to establish the correct amount of tax due, in the event the accountancy services provider is determined as a MSCP, and your company is not able to prove it is not an MSC.
Could other accountancy services providers be affected?
So far, IPSE is only aware of two accountancy services providers that have been determined as MSCPs by HMRC. However, should they successfully prove that they are MSCPs, they may come after more accountancy services providers and later tax years. This would then result in company clients being classed as MSCs and responsible for the liability for unpaid employment income and National Insurance for that tax year.
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