Confusion reigns over MSC approval schemes – or does it?

Accreditation scheme

For some months there has been speculation that an accreditation
scheme, whereby HMRC will exclude certain organisations that are
accredited from the scope of the MSC legislation, is under consideration
by HMRC. Whilst this may be in the interests of those organisations
that operate as centralised “accountancy” service providers  to workers
provided via limited companies, the idea has always been open to
question.

Within the legislation the government is empowered to
exclude certain types of organisation by order. On the face of it, to
exclude centralised service providers that otherwise would be classed as
Managed Service Company Providers would appear to be out of the
question as defeating the objective of the legislation. Therefore there
would need to be some approval method by which such organisations would
become accredited – perhaps by accepting that advice given and services
offered are in line with tax legislation.

HMRC has consistently
said that it has insufficient resource to set up such a scheme. Our own
enquiries of HMRC have established that an accreditation scheme has
been considered and wholly rejected, and so speculation in relation to
an accreditation scheme is nothing more than that.

Audit scheme

More
recently it has been suggested that a separate scheme, an audit scheme,
is to be announced in the near future and is close to fruition. To some
extent this may have been fuelled by an announcement on the HMRC
website that a scheme is being considered, but it is important to note
that the words used by HMRC say nothing more than that. It is more than a
leap and a bound to read into it that any such scheme is imminent.

This
scheme would involve the undertaking of audits of scheme providers, the
audits apparently to be undertaken by the big four accountancy firms.
The suggested benefits would include enabling employment businesses to
identify whether a personal service company operating with assistance
from a scheme provider would be an MSC. It is impliedly suggested that a
service provider passed by the “imminently to be announced” audit would
not be an MSCP.

In our opinion such a scheme would be dangerous
unless it is fully accredited by HMRC. This is because to exclude any
risk to an employment business using the audited service provider, HMRC
would have to accept that the positively audited organisation is
accepted as excluded from the MSC legislation for the audit approved
period. Otherwise the risk of being caught by debt transfer as a result
of using such a provider remains roughly the same as if there is no
audit scheme.

It is also rumoured that there may be a scheme to
audit employment businesses processes in relation to the use of personal
service companies. If the processes meet a standard then the assumption
is that the employment business will be immune from transfer of debt,
otherwise there is no point to it. Again this could not possible work
without full HMRC endorsement. And it is hard to see how it is possible
to accurately audit process in a way which will establish conformity
given that the policies of management are not always followed by
consultants dealing with the candidates, and internal practice may
change from day to day.

But this is to ignore a more important question. Is any audit scheme on the cards at all, let alone close to fruition?

Whilst
an audit scheme may be under consideration, I understand that it is at
the very earliest stages, no framework for discussion with the
accountancy profession having yet been agreed. Nor has the format for
any audit been settled, and the ramifications have not yet even been
fully considered by government. Even if a scheme is put forward by HMRC
in due course, acceptance by the accountancy profession, which would be
key to its operation, is by no means certain.

Considerations by
both government and the accountancy profession would no doubt include
matters relating to conflict of interests, and the protection of the
founding principles of the MSC legislation which extend to ensuring that
tax is not avoided by workers operating through limited companies with
the help of a service provider operating  for that purpose. Accordingly
any such scheme may only result in genuine accountancy firms being able
to establish that they are not MSCPs. Only to that extent would it help
employment businesses determine whether a personal service company is an
MSC, and help contractors seek advice from the right quarter.

Unless
the government does a policy U-turn, in my view such a scheme is
unlikely to assist organisations that are set up to help personal
service companies to avoid tax, other than by identifying them as no
longer having any role to play in the market place. In the meantime
someone would have to pay for the scheme – I doubt the mainstream
accountancy profession would wish to contribute.

Danger of speculation

The
implication of persistence of speculation and rumour concerning such
schemes is that one or other will be brought in. As can be seen, that is
not to be the case for accreditation, and may not happen for some
considerable time, if at all, for an audit scheme.

There is a
danger for employment businesses in relying upon rumour or speculation
in this area. To do so may undoubtedly result in either delaying or
skewing policy decisions relating to the use of MSCs. Danger already
exists for some employment business themselves classed as MSCPs, and
arises on 6th January 2008 when the debt transfer provisions apply
generally. Relying on the misplaced belief that an audit scheme will
save the day is unlikely to influence the tax inspector.

Not
wishing to be a stick in the mud, but the time to consider any scheme is
if and when it is actually announced, and not before. Would a scheme to
protect employment businesses be a good idea? Yes, but that, and
whether it is possible, are other questions altogether.

Here’s a
thought for a scheme that would not involve expensive audits at all, and
that seems to appeal to agencies we have discussed with. The scheme
would involve HMRC recognising worker companies, that are genuinely in
business on their own account, by way of a certificate. This allows the
company to seek accountancy advice from wheresoever it chooses, take
advantage of tax breaks for companies, and the employment business to
pay gross without fear of debt transfer. It would also seem to meet
HMRC’s stated objectives in recovering correct levels of tax. A scheme
such as this, already exists – CIS. Now, does that have any merit?

Further information

This issue will be covered and more information will be provided by HMRC policy representative, Robin Wythes at Lawspeed’s MSC and EAA Regulations seminar and Q&A session on 11th October 2007 at London Chamber of Commerce, for which bookings (call 01273 236236) are currently being taken.

Adrian Marlowe
Lawspeed
19th September 2007