MSCs: HMRC could clampdown on 'accountants'

Managed service company providers (MSCs) who continue to provide services to one man limited companies by claiming to be 'professional accountants' will be the focus of a clampdown by HMRC, putting contractors and recruiters at financial risk, according to leading legal and tax experts advising giant group plc, the contractor services company.

Legislation introduced in the Finance Bill 2007 states that one man limited companies will be deemed MSCs, if they are supported by a specialist service provider (MSC provider) who is 'involved' with their company.

If a one man limited company is deemed to be an MSC, then the company will owe full PAYE tax and National Insurance on all of its contract income. For a contractor earning £50,000 a year that would roughly equate to an additional annual tax bill of £10,000. Unpaid tax debts will be transferable to third parties, including recruitment agencies and end users from January 2008.

Accountants

According to law firm Baker & McKenzie LLP, which advises giant group, existing MSC providers who now claim to be 'professional accountants' and who continue to provide services to one man limited companies, are operating contrary to the spirit of the legislation.

HMRC itself has issued two press notices in recent months stating that it is aware of many MSC providers passing themselves off as 'professional accountants' and that from the promotional material it has seen they are unlikely to avoid the application of the legislation in this way.

Accountants KPMG considers that HMRC will initially target all MSC providers relying on the 'professional accountants' exemption built into the legislation.

According to Baker & McKenzie LLP, the Treasury has already demonstrated its willingness to tighten the legislation in response to MSCs' attempts to get around it prior to the Budget, so it is likely to further strengthen the legislation in response to MSCs re-branding themselves as 'professional accountants'.

Debt transfer

John Chaplin, tax director at KPMG, said: "We are advising agencies and end users to do everything possible to reduce debt transfer risks. One easy way would be to stop engaging workers through MSC providers incorrectly claiming to be 'professional accountants' whilst still offering the same off-the-shelf solutions."

Matthew Brown, Managing Director, giant group, said: "Contractors and recruiters dealing with MSC providers are taking huge financial risks. A lot of MSC providers are reassuring their clients that they are fully compliant with the new law, but they are fooling themselves if they think HMRC would introduce anti-avoidance legislation, only to leave a 'loophole' allowing MSC providers to sidestep it by claiming to be 'professional accountants'.

James Wilson, of Baker & McKenzie LLP, agrees: "MSC providers offering a narrow range of services almost exclusively to contractors are unlikely to fall within the exemption that applies to 'professional accountants', irrespective of whether they have professional accreditation.

"HMRC will almost certainly look at whether MSC providers are providing the wide range of bespoke services to a diverse clientele you would expect of a high street firm of accountants (or solicitors). Are these MSC providers providing inheritance tax and insolvency advice, for example, and servicing clients other than contractors?"

On April 6 2007, giant withdrew from providing services to limited company contractors to focus instead on its umbrella company solutions.