Several contractors have been placed under investigation by HMRC over the management of their finances. Despite contesting the investigation, advisors representing the contractors have alleged that HMRC has failed to adequately respond to resolve the issues.
A relatively unknown tax regulation known as Managed Service Company (MSC) law is designed to ensure that contractors are responsible for their own limited companies. This is so that limited companies cannot take advantage of paying lower tax rates via corporate and dividend taxes, rather than employment taxes if the company is controlled or operated by another third-party such as a financial advisory or accountancy firm. When the third-party falls under MSC regulations, HMRC deems all their clients as liable for paying standard employment tax, including PAYE and National Insurance.
MSC law has often been criticised for being ambiguous and applied by HMRC on an arbitrary basis. The advisory firm Qdos has commented that HMRC seems to impose penalties without looking into the specifics of the company under investigation.
Over 1,000 notices were sent to freelancers and contractors in March 2022, accusing them of breaching MSC law. Advisors operating on behalf of the freelancers have alleged that most appeals result in HMRC failing to acknowledge any specific details, only putting any additional tax liabilities on hold in anticipation of a further tribunal decision.
Qdos has stated that the average tax amount demanded by HMRC for allegedly breaching MSC regulations is £57,000, in some cases up to £69,000, on top of additional late payment penalties.
Another two accounting firms, Boox and Churchill Knight & Associates (CKA) were accused of breaching MSC regulations, leading to major repercussions for both themselves and their respective clients. Boox was eventually forced to suspend its operations due to the negative impact caused by HMRC’s investigation, and CKA is currently attempting to raise additional funding with the aim of launching a tribunal challenge against HMRC.
Amidst the numerous allegations that HMRC is often applying ambiguous MSC rules on an arbitrary basis, HMRC has reiterated its official stance that ‘…people who work like employees must pay tax like employees’ – all investigations are designed to ensure that companies and contractors alike are paying the right amount of tax.