HMRC on the Hunt for Managed Service Companies in 2022

HMRC is finally utilising the tools at their disposal in their inquiry into Churchill Knight and the repercussions of the investigation could be huge; potentially affecting every agency and end client within their supply chain.

The legislation to remove the tax advantage offered by using Managed Service Companies (MSCs) was implemented in 2007 but until now, only Costelloe Business Services, part of the i4 Group, has been prosecuted under it. This case comes as a warning to agencies and contractors using limited company accountancy services, that HMRC are once again on the hunt.

If HMRC are successful in their challenge against Churchill Knight under this legislation, they could demand that backdated PAYE is paid by the limited company on all income it has received whilst using Churchill Knight’s service.?If the limited company is unable to pay, the transfer of debt clause, means that tax debt can be passed to anyone in the supply chain - the contractor on a personal level, the accountants, the directors of the accountants, the agency, the directors of agency or even the end client! There is no hiding behind limited liability when it comes to MSC legislation. This is the kind of ruling that could put lots of companies out of business and force contractors, directors of accountancy firms and directors of recruitment agencies to declare themselves bankrupt!

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How do you know if there are MSCs in your supply chain?

To fall foul of the MSC Legislation, there must be both a Managed Service Company and a Managed Service Company Provider (MSCP).

The definition for a MSCP is a “person who carries on a business of promoting or facilitating the use of companies to provide the services to individuals”. A company who markets their accountancy services to contractors, could potentially be classed as a MSCP.

?In order for the limited company to be deemed an MSC however, the MSCP must be 'involved' with the client company. To be classed as involved, it must meet any of these 5 rules:

• Benefiting financially from the provision of services of the worker on an ongoing basis
• Influence or control the provision of services.
• Influence or control the way payments to the worker are made.
• Influence or control the finances or activities.
• Promote or make good any tax loss, including providing or promoting insurance.

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What does an MSCP look like in reality?

Understanding MSC legislation can be a headache, but it’s necessary if you want your business and your contractors to stay on the right side of HMRC. So, to break it down this is what a MSCP could look like in a real-life situation.

A company that markets themselves as a contractor accountancy firm, sets up a PSC for an individual and charges them a fixed monthly price, and either includes IR35 insurance in the package or promotes a specific company that can provide IR35 insurance.

If you are using an umbrella company that offers or has previous offered limited company solutions, be extremely careful. They could be next in HMRCs firing line and both you and your contractors may get caught in the crossfire.

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