Income Shifting Legislation

Article written by Lawspeed.

For some months there has been speculation that an accreditation scheme, whereby HMRC will exclude certain organisations that are accredited from the scope of the MSC legislation, is under consideration by HMRC.

Whilst this may be in the interests of those organisations that operate as centralised "accountancy" service providers to workers provided via limited companies, the idea has always been open to question.

Within the legislation the government is empowered to exclude certain types of organisation by order. On the face of it, to exclude centralised service providers that otherwise would be classed as Managed Service Company Providers would appear to be out of the question as defeating the objective of the legislation. Therefore there would need to be some approval method by which such organisations would become accredited - perhaps by accepting that advice given and services offered are in line with tax legislation.

HMRC has consistently said that it has insufficient resource to set up such a scheme. Our own enquiries of HMRC have established that an accreditation scheme has been considered and wholly rejected and speculation in relation to an accreditation scheme is nothing more than that.

Audit scheme
More recently it has been suggested that a separate scheme, an audit scheme, is to be announced in the near future and is close to fruition. To some extent this may have been fuelled by an announcement on the HMRC website that a scheme is being considered. However the words used by HMRC say nothing more than that. It is more than a leap and a bound to read into it that any such scheme is imminent.

This scheme would involve the undertaking of audits of scheme providers, the audits apparently to be undertaken by the big four accountancy firms. The suggested benefits would include enabling employment businesses to identify whether a personal service company operating with assistance from a scheme provider would be an MSC. It is impliedly suggested that a service provider passed by the "imminently to be announced" audit would not be an MSCP.

In our opinion such a scheme would be dangerous unless it is fully accredited by HMRC. This is because to exclude any risk to an employment business using the audited service provider, HMRC would have to accept that the positively audited organisation is accepted as excluded from the MSC legislation for the audit approved period. Otherwise the risk of being caught by debt transfer as a result using such a provider remains roughly the same as if there is no audit scheme.

It is also rumoured that there may be a scheme to audit employment businesses processes in relation to the use of personal service companies. If the processes meet a standard then the assumption is that the employment business will be immune from transfer of debt, otherwise there is no point to it. Again this could not possible work without full HMRC endorsement. And it is hard to see how it is possible to accurately audit process in a way which will establish conformity given that the policies of management are not always followed by consultants dealing with the candidates, and internal practice may change from day to day.

But this is to ignore a more important question. Is any audit scheme on the cards at all, let alone close to fruition?

Whilst an audit scheme may be under consideration, I understand that it is at the very earliest stages, no framework for discussion with the accountancy profession having yet been agreed. Nor has the format for any audit been settled, and the ramifications have not yet even been fully considered by government. Even if a scheme is put forward by HMRC in due course, acceptance by the accountancy profession, which would be key to its operation of the scheme, is by no means certain.

Considerations by both government and the accountancy profession would no doubt include matters relating to conflict of interests, and the protection of the founding principles of the MSC legislation which extend to ensuring that tax is not avoided by workers operating through limited companies with the help of a service provider operating for that purpose. Accordingly any such scheme may only result in genuine accountancy firms being able to establish that they are not MSCPs. Only to that extent would it help employment businesses determine whether a personal service company is an MSC, and help contractors seek advice from the right quarter.

Unless the government does a policy U-turn in my view such a scheme is unlikely to assist organisations that are set up to help personal service companies to avoid tax, other than by identifying them as no longer having any role to play in the market place. In the meantime someone would have to pay for the scheme - I doubt the mainstream accountancy profession would wish to contribute.

Danger of speculation
The implication of persistence of speculation and rumour concerning such schemes is that one or other will be brought in. As can be seen, that is not to be the case for accreditation, and may not happen for some considerable time, if at all, for an audit scheme.

There is a danger for employment businesses in relying upon rumour or speculation in this area. To do so may undoubtedly result in either delaying or skewing policy decisions relating to the use of MSCs. Danger already exists for some employment business themselves classed as MSCPs, and arises on 6th January 2008 when the debt transfer provisions apply generally. Relying on the misplaced belief that an audit scheme will save the day is unlikely to influence the tax inspector.

Not wishing to be a stick in the mud, but the time to consider any scheme is if and when it is actually announced, and not before. Would a scheme to protect employment businesses be a good idea? Yes, but that, and whether it is possible, are other questions altogether.

Here's a thought for a scheme that would not involve expensive audits at all, and that seems to appeal to agencies we have discussed with. The scheme would involve HMRC recognising worker companies, that are genuinely in business on their own account, by way of a certificate. This allows the company to seek accountancy advice from wheresoever it chooses, take advantage of tax breaks for companies, and the employment business to pay gross without fear of debt transfer. It would also seem to meet HMRC's stated objectives in recovering correct levels of tax. A scheme such as this, already exists - CIS. Now, does that have any merit?