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MSC Legislation and Contractors

HMRC have recently sent income tax bills of up to £50,000 to 1,000 contractors, after accusing their accountancy firm of breaking the Managed Service Company (MSC) tax rules. You might be forgiven for wondering how this can come about and if you are at risk?

 
MSC legislation is designed to ensure that contractors take responsibility for running their own limited companies, stopping company directors from paying typically lower corporate taxes and dividend taxes over employment taxes, where their company is controlled by another party, typically an accountant or tax advisor. The service provider often promoted the use of a Limited company on the basis of higher take home pay for the individual whilst looking to benefit from fee income related to the contractors’ services. For the legislation to kick in the service provider also has to be “involved” in the running of the Limited company, and if they are HMRC will deem all the providers clients as users of an MSC and look to levy PAYE and national insurance on any income earned by the contractor’s business.

What does “being involved” mean?

Where an accountant or service provider acts as company director, controls the company bank account, benefits directly from the profitability of the contractor or makes commercial decisions on behalf of the Limited company they can be said to be “involved”.  Providing professional advice and accountancy services is not “involvement” if the individual contractors make their own decisions with regards to the running of their company, how they extract their income and all other business-related decisions.

What does this mean for you?

As an Orange Genie Accountancy client, you can be confident that the MSC legislation will not bite.  MSC providers often present as offering a set standard package of service to all contractors, including set models on how contractors will be paid. Our approach to supporting clients is far removed from an MSC solution and our annual FCSA accreditation demonstrates our compliance with the rules. We offer bespoke tax planning and business advice to all our clients based on their own circumstances. We encourage you to make the right decisions to suit your circumstances based on your own needs.

On a practical level here are some of the things we do to make sure we offer best advice but do not cross the line and become “involved” in the running of your business: -

-          We never act as a director of your company

-          We do not have access to your bank account and will not receive funds on your behalf

-          We do not negotiate commercial terms with your clients, although we can give you advice on how to do this

-          Our fees are based on the level of service we provide to you and your company. We don’t charge in line with your profitability or turnover

-          We only register you for VAT and open PAYE schemes when you ask us to

-          We never decide how you will withdraw funds from the company – we present options and tax advice, but you decide

-          We never file any of your Financial Statements or Taxes without your prior approval, ensuring you understand what you are submitting

 

HMRC are actively undertaking more compliance activity and it would appear that they have refocused recently on the MSC legislation. If you do receive a letter from HMRC that indicates they are looking to review your status under  MSC you should let your accountant here at Orange Genie Accountancy know straight away. We will robustly respond to any accusation of being an MSC Provider and will gladly provide evidence to support this.

 
In the unlikely event that any of our clients are contacted by HMRC with income tax bills relating to MSC allegations we would urge them to contact us immediately.

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