Clear guidance for agencies, or more confusion?

After many months of speculation, the role of agencies in relation to managed service companies is still not entirely clear despite the recent publication of the long-awaited 48-page HMRC Managed Service Companies Guidance Notes.

From the tone of several comments made in the Guidance Notes, it is clear that HMRC intends to differentiate between those agencies who wish to point a contractor in the direction of a professional advisor who gives ëbest adviceí, and those agencies who clearly have a hidden agenda and/or financial motivation for encouraging contractors into a fixed MSC scheme, without regard to the individual circumstances of the contractor.

Barry Roback, Chief Executive of JSA, one of UKís leading Chartered Accountants specialising in the contracts market, emphasises that the consequences for contractors who are not given proper professional advice could be catastrophic. He says: ìIt is notable that we have already seen a sudden upsurge in so called ëHMRC approved solutionsí that are essentially nothing more than tax evasion schemes which could leave those involved liable for imprisonment under the Money Laundering Regulations. HMRC has made it clear in its guidance that it does not wish to discourage the use of a preferred supplier list (PSL) and recognises that such lists have a legitimate function. However, some agencies are still understandably cautious about operating a PSL through fear of debt transfer, no doubt accentuated in recent months by outlandish claims by some service providers, presumably with an ulterior motive, regarding the use of limited companies in contracting.î

He also stresses that for an agency to refuse any helpful guidance to their contractors, runs contrary to the principle of acting responsibly, and potentially can do more harm than good. And pushing all their contractors towards an ëUmbrellaí solution in order to avoid liability, is not the answer either. ìAfter all, what responsibility rests on an agency which recommends a contractor only into an ëUmbrellaí solution when it transpires that the contractor would legitimately have been better off in a limited company?î asks Roback.

ìIf agencies abandon their PSLís and/or Approved Supplier Lists, the floodgates will be opened to non-compliancy, with many innocent contractors being slotted into inappropriate tax regimes with potential unexpected tax debt. It will leave a great opportunity for disreputable organisations to step in and seduce contractors into dubious schemes - and unfortunately there is clear evidence that they are now wading in with great gusto.î

So what, asks Roback, does the responsible agency do to ensure that their contractors are cared for in a totally compliant but tax efficient manner? He maintains that the answer is to:

a) Maintain an approved / preferred list of those organisations who, in the opinion of the agency, have the necessary experience and qualifications to do a good job.

b) Ensure the list has a spectrum of choice as to solutions provided.

c) Ensure that no weight is given to any organisation on the list.

d) Ensure that there is no beneficial financial link to those on the list.

e) Apply the necessary tests outlined in the HMRC Guidelines to ensure that, as far as possible, those organisations are not MSPís or if they are, that they are not ìinvolvedî with their contractor clients.

So who is and who is not an MSP and how best to determine ëinvolvementí?

The Guidelines make it absolutely clear that professionally qualified accountants, giving individual ëtailoredí advice, are exempt from the definition of an MSP.

To back up this view, page eight of the new MSC Guidelines states that: The legislation provides a specific exemption for persons being MSC Providers (involved with a company), merely by virtue of providing legal or accountant services in a professional capacity. This specific exemption applies only to persons professionally qualified (or training for a professional qualification) regulated by a regulatory body.

ìAs a regulated firm of chartered accountants, JSA meets this criteriaî emphasises Roback ì but the test goes beyond this. The most significant shift in emphasis within the latest Guidelines is not who will and who will not be deemed a Managed Service Company Provider, but what the provider actually does for their clients.î

He points out that for the MSC legislation to apply (and therefore, for a potential liability under the debt transfer provisions to exist), a Managed Service Provider must also be ëinvolvedí with its clients. The Guidelines (Page 11 Para 2.3) state that just because a person is an MSC Provider, it does not necessarily mean that its client companies are Managed Service Companies.

The Guidance Notes go on to clarify the meaning of ëinvolvedí by reference to any one of the following five activities:

1. Benefiting financially ëon an ongoing basisí from the provision of the services ñ e.g. fees linked to actual activity.

2. Influencing or controlling the provision of the services of the worker.

3. Influencing or controlling the way in which payments to the worker are made.

4. Influencing or controlling the companyís finances or any of its activities.

5. Giving or promoting an undertaking to make good any tax loss.

Barry Roback highlights the fact that while the Courts have yet to decide the legal definition of ëinfluencingí in this context, the Guidance Notes go to great lengths to demonstrate that as far as HMRC is concerned, the provision of ongoing company formation, tax advice, bookkeeping and accounting services by a ëprofessionally qualifiedí accountant will not be considered to be ëinvolvedí within the meaning of the legislation.

This confirms the views of the former Financial Secretary to the Treasury, John Healy who said in Parliament on 15 May 2007 that when an individual asks a tax advisor for help or advice in setting up a business to provide that individualís services to end users, he or she considers the individualís position and might recommend a corporate structure that includes the payment of dividends to the individual as a shareholder worker. Healy also emphasised that the tax advisor is not acting as an MSC provider.

Barry Roback believes that the new guidelines do at least give some clarity to the various parties affected by the forthcoming MSC legislation, i.e. contractors, agencies, accountants and end user clients. However, given the Governmentís obvious but understandable reluctance to put a mark in the sand as to what is and is not acceptable, he regrets the fact that some doubts and a degree of uncertainty still remain, particularly for agencies who have a tremendous influence on the what happens within the industry.

ìHoweverî, he concludes, ì despite this uncertainty, there is no reason for agencies to take shelter in their bunkers or to pressurise their contractors into joining ëumbrellaí arrangements when it might put them in an unnecessarily disadvantageous position. And as far as contractors are concerned, as long as their service provider ensures that they make all the important decisions themselves, such as level of salary and when and how much to take as a dividend and manage their own company bank account, they can rest assured that the legislation will not apply to them, especially if the provider of that service is a qualified professional accountant.î