The Treasury effectively put providers of managed service companies out of business in April when it introduced legislation to shut down Managed Service Company schemes, which it claimed, were ‘disguised employment’.

Barry Roback

"JSA claims that the HMRC is clearly now concerned that, since April, recruitment agencies have largely distanced themselves from the financial affairs of their workers for fear of being inadvertently caught out by the effect of the new debt transfer liabilities, which potentially makes them liable for contractors’ unpaid tax. This is evidenced by HMRC’s recent notice reminding agencies that the legislation was not targeted at them but at ‘workers seeking to avoid employed levels of tax and NICs’.

Barry Roback said: "The reason HMRC is so concerned would appear to be that because so many agencies have understandably abandoned their PSLs and/or Approved Supplier Lists, the floodgates have been let open to non-compliancy, with many innocent contractors being led none the wiser into inappropriate tax regimes with potential unexpected tax debt.

"This has led to a great opportunity for disreputable organisations to step in and seduce contractors into dubious schemes – many of them located offshore.

“The guidelines issued to agencies by HMRC are so non-specific yet at the same time so threatening and potentially all-embracing, that it is hardly surprising that agencies are 'ducking’ out and washing their hands of the whole issue. The result is that there are clearly many contractors out there working either in inappropriate circumstances, or quite illegally through offshore arrangements.”

Accreditation scheme
Mr Roback calls for HMRC to introduce an accreditation scheme for service providers, which would give agencies the confidence to re-establish a Preferred Suppliers List without fear of financial reprisals.

He said:“HMRC must already have a set of compliant criteria ready – if it doesn’t, how on earth are expected to implement the current legislation? At the moment, HMRC is effectively inviting agencies to play a ‘guessing game’ whereby they give some ‘clues’ on how to assess whether an MSC provider is legitimate, but warn that if the agency guesses wrongly, they could be liable for transfer of debt.

"As the current guidelines are so open to different interpretations by individual tax inspectors, both agencies and contractors are effectively being asked to play a poker game where HMRC can deal the cards in any way that suits it .

“While I have sympathy for HMRC in its attempt to implement legislation that has been enacted in haste, it is still not too late to salvage the situation. The sooner that accreditation is enabled, the better for all.”

Barry Roback concluded that HMRC must change its approach if the new legislation is to have any chance of meeting its goals. “Judging by the tone of the notice, it would suggest that the negative effect of the legislation is already costing the Treasury a considerable sum of additional unpaid tax. We have consistently argued that it was correct to close obvious abuses by some managed service companies – particularly in areas such as supply teaching, etc - but this particular sledge hammer seems to be cracking some of the wrong nuts.”

Background information
AgencyEye's sister site for freelancers, Shout99, has followed the MSC proposals in detail. For further information see the Political News section.

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Susie Hughes
The Editor © AgencyEye 2007