MSC legislation in the spotlight

MSC legislation in the spotlight

HMRC's recent focus on Managed Services Company (MSC) legislation is attracting attention. 

HMRC’s latest enquiry activity in the contractor space in respect of the Managed Services Company (MSC) legislation has put two accountancy firms directly under the spotlight, and is causing understandable concern to hundreds of contractors trading through their own limited companies. Moreover, there are any number of contractor specialist accountants concerned for their own business models if the outcome of these investigation favours HMRC.

MSC legislation background

The MSC Legislation was designed to tackle third-party ‘providers’ that were effectively running the businesses of their personal service company (PSC) clients, setting up (and often naming) the contractor’s company, invoicing end clients/agencies on behalf of the contractor, determining the contractor’s salary/dividend split, making all payments to HMRC on the contractor’s behalf, arranging insurance cover and even controlling the bank account.

HMRC understandably felt that a contractor whose input into the business was limited to signing a weekly time sheet and an annual tax return was not running their own business, and so the legislation came into effect in 2007.

Being ‘caught’ by the MSC legislation

HMRC compliance activity in relation to the legislation has been effectively non-existent - until now. Consequently, case law is extremely limited by comparison with IR35 legislation when one considers the number of IR35 presenter cases coming to light. The lack of precedent means that the interpretation of the MSC legislation is open and highly subjective.

To be caught by the MSC legislation, four conditions must be met:

a) The company’s business consists wholly or mainly of providing (directly or indirectly) the services of an individual to other entities, as would be the case for contractors trading through their own limited company (PSC)

b) Payments are made (directly or indirectly) to the individual of an amount equal to the greater part or all of the consideration for the provision of the services – most contractors are being paid via their PSC with an amount which is the greater part of the amount invoiced by their PSC

c) the way in which those payments are made would result in the individual receiving payments of an amount (net of tax and national insurance) exceeding that which would be received (net of tax and national insurance) if every payment in respect of the services were employment income of the individual

and the final crucial element:

d) a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals (an MSC provider) is involved with the company.

    All four conditions must apply. The first three would apply to almost any PSC whoever their accountant was. However, it is this fourth condition which is being argued by HMRC with the two accountancy service providers (ASPs). HMRC will be arguing that they are in the business of promoting or facilitating the use of companies for the provision of services of individuals and that they are ‘involved with’ those PSCs.

    The ASPs will be arguing the opposite of this: that they are providing accountancy and taxation services in a professional capacity which might be provided by any accountant, and are therefore not in the business of promoting or facilitating the use of companies to provide the services of individuals.

    Because an MSC cannot exist without an MSC Provider, defined in d) above, HMRC need to also ascertain whether any one of the following five criteria applies and that the MSCP:

    a) benefits financially on an ongoing basis from the provision of the services of the individual

    b) influences or controls the provision of those services

    c) influences or controls the way in which payments to the individual (or associates of the individual) are made

    d) influences or controls the company’s finances or any of its activities


    e) gives or promotes an undertaking to make good any tax loss.

      It is highly unlikely that (e) would apply – contractors will typically buy tax losses insurance from a specialist insurer, and for an accountancy service provider to offer tax loss cover would be a rather obvious trap to fall into!

      Nevertheless, if the MSCP earns a regular fee linked to the engagements of an individual, then certainly (a) might apply. What's likely is HMRC will be arguing that depending upon the nature of the service being provided, at least one of (b), (c) and/or (d) is present - particularly where providers are offering accounting packages where the ‘premier’ or ‘gold’ standard packages are designed to minimise the contractor’s admin and so potentially controlling how the business operates – even if this is not to the extent of those providers who previously literally ran the contractor’s business.

      However, the provisions do not elaborate on what ‘promoting’ or ‘facilitating’ means, or specifically how influencing or controlling the services, payments, company finances etc is defined.

      This brings us to the ‘accountants’ exemption’. The legislation simply provides that where a business is providing legal or accountancy services in professional capacity, then they are not automatically brought within the definition of a MSCP. This is hardly an exemption by any means, and simply calling a business an accountancy service provider will provide no defence.

      Should accountancy practices be concerned?

      A professional accountancy practice should not fall within the MSC legislation. However, as can be seen, the legislation isn’t straightforward, and even non-contractor accounting specialist firms might be wondering how far HMRC wants to apply this legislation.

      A further concern about the MSC legislation is the debt transfer provision, enabling HMRC to transfer the debt to other parties: the individual directors of the MSC, the MSCP and then the MSCP directors. Even recruitment agencies could unwittingly find themselves in the firing line if they are encouraging the use of a MSCP. A dissolved company or one that is no longer trading does not offer a way to avoid the debt because of the debt transfer provisions.

      It is evident from HMRC’s guidance in ‘Spotlight 32’, dated February 2020, that HMRC does not condone the use of MSCs. Their “firm” view and mention of DOTAS could be a tactic to encourage businesses into avoiding these types of arrangements. In a further discussion, HMRC confirms that it continues to open enquiries into similar arrangements, specifically mentioning the road haulage, healthcare and educational industries, and that it will use every avenue available to obtain full settlement. This is perhaps a subtle warning to businesses in those industries that HMRC could be cracking down on the MSC legislation and targeting them soon.

      Case law

      There has only been one case tested in the courts for the MSC legislation, and that was heard at the Court of Appeal in 2019 [Christianuyi and others] where it was upheld that Costelloe Business Services (CBS) was “undoubtedly an MSC provider and the Appellants are undoubtedly MSCs”.

      There was no contention that CBS were in the business of promoting and facilitating the use of companies to provide the services of individuals, but CBS appealed on the basis they were not ‘involved with’ the companies.

      The findings in this case were based on the facts that CBS benefitted financially on an ongoing basis by charging a standard monthly fee, money was not held in client accounts, and CBS accrued interest on these amounts which the courts stated was control. CBS influenced and controlled the way in which payments were made and persuaded individuals to use specific bank accounts. Interestingly, however, the court concluded there was no influence or control where monies were automatically taken, even though the PSCs did not know exact amounts until after.

      What can we learn from this?

      While the judgement undoubtedly clarified – and widened – the scope of ‘influencing’ and ‘control’ in respect of how a MSCP is ‘involved with’ a PSC, it is of limited use for any MSCP defence. CBS had already accepted that they were a MSCP and were only arguing that they were not ‘involved with’ the PSCs. As such, there was no judicial discussion or clarification around what may or may not be ‘promoting’ of ‘facilitating’ the use of companies for the supply of services of individuals. In Markel's opinion, this is where a defence stands or fails – is there a MSCP? Once you start having to consider the ‘involved with’ provision, you're almost certainly on the back foot, with very little room for manoeuvre.

      Undoubtedly, setting up and managing PSCs for individuals who do not run their own business is a risky arrangement, as HMRC would consider these arrangements to fall squarely within the MSC legislation, and reliance on the ‘accountant’s exemption’ will likely not bring much comfort. HMRC is unpredictable in its activity, but these latest enquiries show that it has a renewed confidence and commitment to tackling MSCs. Any similar arrangements should be considered carefully to ensure they don’t fall within the legislation.

      These current enquiries could have far-reaching consequences for the sector as a whole. Both ASPs currently under enquiry will be awaiting the outcome of these enquiries with some concern. It could leave the business models of many other ASPs in tatters and result in many thousands of PSCs receiving unexpected tax bills.