HM Revenue & Customs (HMRC) has released new guidance warning freelancers, contractors and consultants of the risks associated with Managed Service Companies (MSCs) – complex tax schemes that can leave independent workers facing tax bills running into tens of thousands of pounds .
Introduced in 2007, the MSC legislation aims to combat alleged tax abuse by freelancers who offer their services through limited companies set up primarily to avoid tax liabilities. These companies, audited by a third party (often an accountant), are known as Managed Service Companies. HMRC states that freelancers should not receive the tax benefits of running their own business if the business is effectively managed by someone else and used purely as a means to reduce tax payments.
Under the MSC rules, if a freelancer’s business is deemed an MSC, HMRC will require any income generated to be subject to PAYE tax and national insurance contributions. This can amount to up to 40% of the revenues the MSC has earned since its inception, once taxes, interest and any penalties are applied.
The latest guidance, published on November 21, highlights the significant risks for freelancers working through MSCs. More than 1,000 contract workers are currently being investigated by HMRC in an ongoing case for alleged breaches of MSC legislation. Of the more than 100 contractors supported by tax service Qdos, HMRC’s average tax liability is £57,000, making a combined total of £5.9 million.
Seb Maley, CEO of Qdos, emphasized the importance of vigilance among freelancers: “HMRC is right to put the MSC legislation back on the radar of the hundreds of thousands of contract workers who could be affected. These notoriously complex tax rules can leave freelancers with staggering tax bills, often with no real debt. All too often, these unsuspecting freelancers are advised by third parties to work through MSCs.”
He added: “The problem with these rules is that freelancers involved in MSCs have no incentive to avoid tax. They have usually hired an accountant who specializes in their sector and in setting up limited liability companies. It smacks of unfairness, but the fact is that if you fall into the trap of working through an MSC, the tax authorities could claim as much as 40% of everything you have earned through your company so far.”
Freelancers are urged to review their working arrangements and seek professional advice to ensure compliance with HMRC regulations. The potential financial implications of MSC designation are significant and could have long-term implications for the livelihoods of independent workers.