Out-of-date legislation is being used to hound our smallest businesses

By Fred Hicks, Senior Policy and Communications Adviser?

In May 2007, the then Labour Treasury Minister took to his feet to defend the?Government’s proposals for ‘Managed Service Company ’ legislation during a Public Bill Committee session.

Having already consulted with industry, Government had built a strong consensus around the need to tackle the growing abuse of ‘Managed Service Companies’ (MSCs) – bogus one-person companies that were sold and controlled by ‘MSC Providers’ to help lower an individual’s tax bill; a form of ‘disguised employment’ that the IR35 rules couldn’t combat. To fix this, government wanted to capture the activities of a Provider in legislation and apply tax charges to the income of the service companies it controlled – this is the basis of today’s MSC rules.

Defending government’s approach in 2007, the Minister felt compelled to acknowledge: “there is, understandably, much concern that there could be collateral damage to those who are genuinely in business on their own account…” before assuring the House that the distinction between an MSC Provider and another service provider – say, an accountant – is “quite clear”.

Unfortunately, 16 years later, around 2,000 contractors have been blindsided by life-altering tax bills under this legislation after HMRC took a different view of their accountant’s business – seemingly proving those concerns right.

Dedicated rules shut the MSC market down overnight

When MSC legislation was first drawn up by Treasury officials, it was done so to tackle a specific form of tax avoidance which was widely understood to be subverting the tax system, particularly IR35.

Treasury officials set out the kind of entity they wanted to target with these new rules – but reading the 2006 consultation document ‘Tackling Managed Service Companies’, there are some big differences between what HMRC seems to be interested in today, and the challenge that was sold to MPs and industry more than 15 years ago.

Firstly, there is the MSC operating model, which is strikingly distinct from that of a genuine limited company. As set out in the 2006 consultation, MSCs were effectively ‘off the shelf’ entities marketed to individuals by Providers who would set up and even name the companies on the individual’s behalf. At the end of a work assignment, it was common for Providers to dissolve or reallocate these bogus companies to other individuals. Providers would even form part of the supply chain, handling payments from agencies before passing them to the MSC – minus a fee.

The 2006 MSC challenge was also one of worker exploitation. In the ‘Tackling MSCs’ paper, government noted evidence to suggest that a significant proportion of the MSC population were workers who had been coerced or forced into these arrangements without fully understanding them.

They subsequently would have lost out on employment rights that they should, in reality, have been entitled to. The lack of control these workers would have had over their arrangements would have also made them vulnerable to unauthorised deductions by unscrupulous operators.

Today’s dispute feels a world apart from the 2006 MSC challenge

But when we talk about contemporary MSC investigations, we’re referring to a cohort of around 2,000 contractors – almost all of whom have operated as independent businesses for years or have since retired – who now face ruinous, retrospective bills for their use of an accountancy services provider, their packages, and their digital accounting tools. HMRC say that this amounts to ‘influencing or controlling’ their client companies’ finances and activities.

What makes this even more frustrating for those caught up in this is that, by the very nature of the services they provide, accountants are exempt from these rules. So, when does an accountant become an MSC Provider? HMRC would argue that they must be in the business of “promoting or facilitating the use of companies to provide the services of individuals” – a boundary that they are seemingly trying to test today.

Contractors might see this as yet another means for HMRC to challenge their status as independent businesses. After all, can HMRC really be telling us that the accountancy exemption was not meant for firms that specialise in working with freelancers, who already deal with the hassle of IR35?

The circular reasoning behind government’s approach

Scrutinising the draft legislation back in the 2007 Committee session, one Conservative MP queried: “where an accountant specialises in giving advice to freelance workers and contractors… there is a danger that they might be construed as being in the business of promoting or facilitating the use of companies to provide the services of individuals[?]”

The Minister replied:?“Freelancers… who are engaged directly by any agency or who are in some way in business on their own account… are simply not affected by the legislation. Only those freelancers… who operate through managed service companies will be affected by the changes that we propose.”

In light of today’s MSC investigations, it’s difficult to interpret this clarification to mean anything more than “an accountant is an accountant – until we decide they aren’t”.

The political case for a change of tack hasn’t been made

IPSE is campaigning for the ongoing MSC investigations to be brought to a halt whilst the MSC legislation, and HMRC’s application of it to contemporary contracting, is reviewed.

We aren’t doing this to specifically challenge HMRC’s own view of the accountancy firms in question – it is not for us to say whether the use of Apps, portals and similarly digital means of engaging with an accountant should be considered tax-compliant.

However, where the measures to tackle the specific MSC challenge of the noughties were subject to extensive consultation with industry and scrutiny by MPs, you won’t find mentions of things like Apps, online portals and so on – these simply didn’t exist, or were very rudimentary if they did, and were therefore never presented as a component of the MSC challenge government wanted to tackle.

If HMRC, the Treasury, and Ministers decided that digital accountancy tools – the use of which has been allowed to soar in the intervening years – are something they don’t agree with, why have we only learnt of this via a tranche of intimidating Regulation 80 notices sent by post?

The answer is that government has shied away from the work needed to create clear rules for the modern freelance economy, instead hoping to discretely create new rules by aggressively pursuing thousands of hardworking freelance business owners, at the expense of their emotional wellbeing.

Help end the confusion by contacting your MP

It’s difficult to reconcile government’s approach to MSC enforcement today with its separate drive to rollout Making Tax Digital. But if it is intent on this approach, it surely warrants clear, new rules with input from industry, and from MPs who haven’t scrutinised this issue since the original rules were introduced. That’s why we want to get them talking about it again.

Very many of our members have already written to their MP since we first issued our call for support last week – we are grateful for your support and we are encouraging contractors, whether they are impacted by today’s investigations, to do the same.

We’ve created a template letter for you to download and amend as you see fit, which you can find on our MSC campaign page, along with a link to the ‘find your MP’ tool.

Join the campaign – Write to your MP