More than a thousand contract workers have been deemed guilty of breaching the Managed Service Company (MSC) legislation by HMRC, which says it is carrying out further enquiries into this area of taxation as it contacts numerous contractor accountants.
This could signal the start of widespread investigations among potentially hundreds of thousands of contractors, along with accountants that advised their contractor clients to operate in this manner, according to tax consultancy, Qdos.
The MSC legislation was introduced in 2007 to combat perceived tax abuse by contractors who provide their services via a limited company, which is controlled by a Managed Service Company Provider (MSCP).
The legislation is complex, but there are fears that large, mainstream specialist contractor accountants could fall within HMRC’s crosshairs.
As also reported by the Financial Times, HMRC believe contractors should not receive the tax benefit of running their own business if the business itself is controlled by another party and only used as a vehicle through which to pay less tax.
Contractor accountants could be held liable
The effect of the MSC legislation is similar to that of IR35, but is said to be potentially greater given the tax liability is likely to apply to the lifespan of a contractor business, rather than just one contract.
If the contractor is unable to pay this, liability travels up the labour supply chain. It means MSC investigations impact contractors, along with accountancies, recruitment agencies and possibly the business engaging the worker.
The same circumstances will apply to all contractors who used a particular provider. It means hundreds, or sometimes thousands of contractors could fall foul of the legislation through just one enquiry.
MSC could send ‘shockwaves’ through sector
Seb Maley, CEO of Qdos, said: “With the dust barely having settled on IR35 reform, contractors and the accountants supporting them are braced for another threat.
“HMRC is ramping up its compliance activity and is not just set on targeting contractors, but their accountants too. And if the contractor can’t pay what could be anything up to 40% of turnover since the MSC was formed, accountants could be passed the liability.”