News has reached us that contractors have received letters from a certain well-known accountancy service provider saying that HMRC has suggested that their PSCs (Personal Services Companies) are in fact MSCs (Managed Services Companies). This is very bad news.
The difference between a P and an M could actually be a lot of money and anyone receiving this type of letter should act quickly. If the taxman is right about this and you do indeed have an MSC, that means they can go back four years (possibly more) to redo your tax, so whatever your business received must have operated PAYE , including paying you an employer’s national insurance bill.
So what is an MSC?
It is defined by an anti-avoidance law introduced in 2007 as a business that has two important characteristics – it must have an MSC provider, and the MSC provider must be involved with it. To decompress a little:
An MSC provider is someone who “engages in the business of promoting or facilitating the use of businesses to provide the services of individuals”. Focus on the word “facilitate” and apply it to a business that specializes in providing accounting services to “businesses that provide the services of individuals,” aka PSC. Doesn’t it sound more like an accounting service provider?
“Involved” also has a legal definition of its meaning. An MSC supplier can be “involved” in your CSP in five ways, three of which may be important:
- He may earn money on an ongoing basis through the provision of your services;
- This may influence how your CFP payments are paid to you (for example, as dividends or salary);
- This can influence your business finances.
Going beyond those definitions might seem like a stretch, but unfortunately the way the courts have interpreted them leaves ESPs on the back foot and with severely weakened defenses.
Who is responsible ? It’s the contractor!
You might be wondering: why did my accounting firm get me into this? Shouldn’t they foot the bill?
Fair questions, and chances are your accounting service provider did take steps to ensure they were not an MSC provider. Unfortunately, if you received one of these letters, it failed to convince HMRC.
Also, they can’t just capitulate and pay the bill themselves because it will certainly be unaffordable for them – the sums of money will be enormous. On the other hand, they can’t fight the income without involving you. This is because the IRS must issue a “determination” to your business before they can take action against them.
Worse, he can also personally transfer the debt to you, the MSC Director, so you can’t just hide behind your business.
what you should do
So what if you get a “determination”? This is a legal document issued by HMRC.
David Kirk, who runs a tax consultancy specializing in this area, provides specialist advice:
- You must appeal within 30 days of it being issued or you may be too late. HMRC may accept appeals after this date, but is not obliged to.
- Remember that you actually paid a lot of taxes, which the taxman won’t want to remind you of. If they’re asking for £50,000, they need to take into account that you’ve probably already paid them around £35,000.
- Check to see if you have tax expense protection insurance if it covers you for this. It might help, but chances are that while it will cover the income challenge fee, it won’t help you get the tax compensation you’ve already paid.
- Don’t let your accountant fight for you. Some level of cooperation with them will be necessary, but they are compromised and have their own interests to defend.
- Join others in the same position: These tax raids are extremely expensive to fight alone.
ContractorCalculator worked together with David Kirk to form the “MSC Survivors Group”. The aim of the group is to work together and pool resources in a cost-effective manner.
MSC Survivors Group – Get Help