HMRC has published new guidance to warn freelancers, contractors and consultants about the risk of ‘Managed Service Companies’(MSCs) – complex tax arrangements that can pose a huge risk to the hundreds of thousands of independent workers operating via their own limited companies in the UK.
The MSC legislation was introduced in 2007 to combat perceived tax abuse by freelancers who provide their services via a limited company set up for the purposes to avoid tax. These companies, controlled by a third-party, are known as ‘Managed Service Companies’.
HMRC believes that freelancers shouldn’t receive the tax benefit of running their own business if the business itself is managed by another party – often an accountant – and only used as a vehicle through which to pay less tax. If a freelancer’s business is deemed to be an MSC, HMRC will insist that all income generated is subject to PAYE tax and national insurance. This could, after tax, interest and possible penalties, equate to 40% of income earned by the MSC since its formation.
The guidance, published by HMRC on 21st November, warns freelancers about the risks of operating via MSCs. In an ongoing MSC case, currently over 1000 contract workers are under investigation, with HMRC of the view that they have breached this legislation. Of the 100-plus that Qdos is supporting, the average tax liability pursued by HMRC stands at £57,000 and collectively at £5.9m.
Seb Maley, CEO of tax compliance expert, Qdos, warned freelancers about the importance of freelancers being vigilant, he said, “HMRC is right to put the MSC legislation back on the radar of the hundreds of thousands of contract workers it can impact.
“These notoriously complex tax rules can leave freelancers with staggering tax bills, often through no real fault of their own. All too often, these unsuspecting freelancers have been advised to work via MSCs by third parties.
“With a major case yet to be closed, it’s no secret that HMRC believes many freelancers have been or are currently working through MSCs – much to the surprise of these freelancers, I should add.
“The trouble with these rules is that freelancers caught up in MSCs aren’t motivated to avoid tax. Typically, they will have engaged an accountant that specialises in their industry and in forming limited companies.
“It smacks of unfairness, but the fact of the matter is that if you fall into the trap of working through an MSC, the tax office could well demand up to 40% of everything you’ve earned through your company to date.”
