01/05/07 - MSC Legislation Update

Following the publication of the draft Finance Bill in March 07 there has been considerable speculation concerning the meaning of some of the definitions. In particular the section that excludes organisations that provide accountancy and legal advice allows interpretation that facilitates the suggestion that some service providers to contractors can continue as usual. Does it or doesn't it?

In our opinion if this definition is allowed to remain as currently drafted there is likely to be litigation between HMRC and those service providers that do not pay contractors purely by way of employment. The stakes are clearly high for both sides. If HMRC were to lose the floodgates would once again be open. If HMRC were to win the service provider and the contractors concerned would face a substantial bill.

One conclusion from the above may be that HMRC will not attack any organisation that is relying upon the accountancy advice exclusion unless it feels it has a cast iron case. Since a cast iron case may be difficult to establish it may follow that HMRC will be reluctant to move into attack mode. The result could then be a similar stalemate to that which preceded this legislation in relation to IR35, allowing service providers once again to flourish.

Perhaps more important than the wording of the exclusion, the tax bill may end up on an agency's doorstep under the proposed third party liability provisions if using contractors through such a service provider. This bites in August 2007 if the agency collaborates with the service provider or otherwise "influences" the contractor to operate through a limited company. Therefore agencies that are risk averse should avoid use of such service providers at least until the position is clarified.

The provisions within the Finance Bill are already in effect due to an order made on Budget Day. However it is yet possible for the draft Finance Bill to be amended, and there is a groundswell amongst both agencies and accountancy firms for amendments to be made to make the position more clear, not the least based on the principle that legislation should be clear and unambiguous. We would certainly urge the Treasury to amend on this basis.

The Finance Bill is being debated this month and any changes should be known by mid to end June. We shall be holding a seminar on the 25th July on the issues that arise - see "AVOIDING LIABILITY FOR MSC CONTRACTOR TAX". The seminar on the 3rd April was extremely well-received. Bookings are provisionally being taken for a second seminar on the 25th July.

Some comments from our first seminar on the 3rd April:

"The presentation was assured and very informative... Hugely impressed (as ever!) with Adrian Marlowe, and Robin Wythes involvement was also highly valuable. It was worthwhile to take the time to drill down into the details."
Gavin Tagg, Spring Group Plc

"Exceeded my expectations - good event."
Rob Crossland, Parasol Limited

"Very helpful."
Natalie Saul, Project IT Resource Limited

"This was a 'must-attend' seminar with comprehensive analysis."
David Owen, United Recruitment Solutions (UK) Limited

For previous articles on this issue please see press section.

1. Latest Download 23/03/07 - Chapter 9 ITEPA - Meaning of "Managed Service Company"
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2. Summary of Consultation Responses
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3. Tackling Managed Service Companies
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4. Transfer of MSC Debts
– Download the Consultation