Alert – MSC risk for businesses referring to umbrellas – live issue
It has recently been widely reported that HMRC is pursuing numerous contractors serviced by the accountancy group Churchill Knight. See for example ‘Shock tax bills for 1.000 UK contractors’ by the Financial Times (the ‘article’) (to access this article, search on Google “hmrc msc investigation financial times”). As indicated in the opening paragraph of this article ‘HMRC move against one accountancy group could affect other firms and their clients’. Many recruitment business (agencies) supplying contractors may not be aware of this legislation or that MSC risk could affect them too.
HMRC introduced the managed services company (MSC) tax legislation in 2007. The purpose was understood to be to stop the use by accountancy service providers of composite companies, which was resulting in significant losses to the Treasury. These were companies that were set up and controlled by a managed service company provider (MSCP) (usually an accountancy service) as a tax efficient company container for multiple contractors.
The measure affected the recruitment supply industry because HMRC included in the legislation the power to transfer unpaid levels of tax debt to the directors of the MSCP and ‘any other person who directly or indirectly has encouraged or been actively involved in the provision by the MSC of the services of the individual…’. ‘Any other person’ includes a referring agency or hirer. In plain English this means referrals of individuals to an accountancy provider that operates as an MSCP could place the referring agency or hirer directors directly in HMRC’s firing line if the tax debt is not paid.
The problem now
HMRC has always had the power to use the MSC legislation to go after companies that are not just composites. As can be seen it is targetting accountancy providers and their contractor company customers. Churchill Knight, referred to in the article, is such an accountancy provider and, in common with many such providers, likely receives referrals from agencies and hirers. The question is then, has this issue slipped under the radar? To answer that question requires a review of how these service providers present themselves.
Umbrella company or payroll provider or other?
Accountancy businesses servicing contractor and temporary or agency workers are often referred to in the industry as ‘umbrella companies’ or ‘payroll providers’. Yet these descriptions can be highly misleading. Although there is no formal definition as such, a genuine umbrella company is generally regarded as one that employs its workers, paying them under the PAYE scheme, wholly outside of the scope of the MSC legislation. A payroll provider is one that simply provides payroll. There are many actual umbrella companies that undoubtedly provide a useful and good service. However a number of ‘umbrella’ businesses offer wider accountancy or company services for contractors, and it is these that may be caught by the MSC legislation. Churchill Knight offers both pure umbrella and company services and is referred to as an ‘accountancy group’ in the article.
Further, some of these accountancy businesses use a trading name common to all services on offer. To compound the problem, if such a business has been validated as tax compliant, for example by accreditation, agencies and hirers lured into using the business could unwittingly be trapped into a potential tax liability that nobody wants.
The article states that Churchill Knight is a member of the Freelancer and Contractor Services Association (FCSA). This trade membership organisation states on its website that it is ‘the UK’s leading membership body dedicated to raising standards and promoting supply chain compliance for the temporary labour market’. Amongst other things, its purpose is to provide tax compliance assurance for users of FCSA members, namely contractors, agencies and hirers. All members are required to undergo a comprehensive due diligence and assessment process undertaken by accountancy and legal experts. Its charter prohibits members from having ‘arrangements which involve the member operations to include a managed services company’, and its members must include all companies in a group.
Is the risk widespread?
However, the same article quotes the CEO of the FCSA as saying that ‘Churchill Knight & Associates was operating no differently from an estimated 150 contractor accountancy firms in the UK — used by hundreds of thousands of individuals’.
Adrian Marlowe, chair of the Association of Recruitment Consultancies (ARC) commented: “This is worrying as it indicates that the problem may be widespread, and like Churchill Knight, some of those accountancy firms may be members of the FCSA which clearly regards the practice as acceptable. Despite assurances to the contrary, it would therefore appear that FCSA membership does not provide any guarantee of compliance. As both company services and umbrella services are offered alongside each other, perhaps under a common trading name, and are jointly accredited, the risk of exposure to MSC debt transfer is real since the tax debt arising may not be recoverable from liable contractors or their MSCP providers “.
what agencies and hirers should do
In the face of this tax threat we recommend the following:
- become familiar with the MSC legislation and understand how it works
- be careful of services offered by group accountancy businesses with multiple company offerings, in particular those using a single trading name across several businesses
- undertake your own diligence checks and if you are not certain what to do use an independent specialist service such as Lawspeed SPA umbrella compliance check
- always use your own protective contract and for examples of some of the issues to cover see here
- recognise that compliant umbrella companies are useful services to engage with.
For more advice on MSC legislation, relevant contract terms or to take advantage of our independent SPA – Umbrella Compliance Checks, call us on 01273 236236.
About Lawspeed SPA – Umbrella Compliance Checks.
The advantage of using a professional independent service to undertake your checks is that the service will work for the best interests of the hirer or agency, our client. Our insurance backed service is undertaken by qualified lawyers and is entirely focused on an assessment of the MSC risk posed by the company service provider. After audit a report of the risk level is provided to the client. To avoid multiple audits of the same service provider, and thus multiple cost charges, Lawspeed SPA logo is provided for use by the audited company for the period of validation. To avoid confusion over names, only the company audited has use of the logo and the report is limited to that company only. Businesses operating under a group trading name do not qualify for use of the logo.
Lawspeed has been advising the recruitment industry since 1997. Lawspeed group corporate clients benefit from immediate up to date advice on staff engagement and related regulation; employment status; client, IR35, PAYE, and umbrella contract templates; contract review/negotiation; self-employment and CIS contract templates; trade membership and government representation; accreditation services and a state of the art digital contract management platform.