The MSC Legislation - What to do if HMRC contacts you

HMRC activity indicates renewed focus on the MSC legislation, which leaves tens of thousands of contractors exposed

In recent weeks, HMRC has taken the view that a number of contractors have breached the Managed Service Company (MSC) legislation, also issuing letters to over 1000 other contractors as the tax office carries out widespread enquiries into this area of taxation. 

HMRC has also said it’s contacting numerous accountancies that may have facilitated these arrangements for the many thousands of contractors they engage or have previously supported. 

If you’re unsure what the MSC legislation is, if it affects you and need clarity on what to do if HMRC contacts you, please read on. 
 

What is a Managed Service Company (MSC)?

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). 

HMRC’s argument is that contractors should not receive the tax benefit of running their own business if the business itself – a Managed Service Company (MSC) – is controlled by another party and only used as a vehicle through which to pay less tax. 
 

How does MSC impact contractors?

If a contractor is deemed to be a MSC, the contractor is liable, irrespective of whether they were advised to operate in this manner by their accountant. HMRC may insist that all income generated by the MSC is subject to PAYE tax – this could, after tax, interest and possible penalties, equate up to 40% of income earned by the MSC. 

The effect of the MSC legislation is similar to that of IR35, but potentially much greater given the tax liability is likely to apply to the lifespan of a contractor business, rather than just one contract.
 

How many contractors could be affected?

In theory, any contractor who has engaged a specialist contractor accountant is at risk of being investigated by HMRC. This could amount to tens, even hundreds of thousands of contractors, given the tax office is able to look back as far as six years. 

Given HMRC is also contacting numerous accountancies regarding MSC compliance, hundreds or sometimes thousands of contractors could technically fall foul of the legislation through just one enquiry.
 

What if a contractor can’t afford to pay these sums? 

As per the legislation, the liability would travel up the labour supply chain. It means MSC investigations impact contractors, along with accountancies, recruitment agencies and possibly even the business engaging the worker. 
 

What should contractors do if HMRC makes contact? 

Contact a trusted expert, such as Qdos, immediately and before a response is issued to HMRC.

At the time of writing, thousands of contractors may have already received a letter from HMRC. Qdos is supporting a number of these contractors that HMRC believes owe a significant amount in tax.

While the tax office claims these contractors have operated non-compliantly, HMRC’s opinion can be contested. Similar to IR35 investigations, trusted advice and professional representation is always advised. 
 

What can contractors do if they’re concerned?

HMRC could investigate any contractor regarding MSC compliance, but particularly those engaged by specialist contractor accountancies. So if you have any concerns, please don’t hesitate to contact our award-winning tax team on 0116 2690992 or [email protected].