HM Revenue & Customs has sent income tax bills of up to £50,000 to 1,000 contractors after accusing their accountancy firm of breaking tax rules, in a move experts warn could impact dozens of accountants and hundreds of thousands of freelancers.
In March, HMRC accused Churchill Knight & Associates, a specialist accountancy firm, of falling foul of legislation designed to ensure contractors take responsibility for running their own limited companies.
In letters sent to the firm’s clients, seen by the FT, HMRC said Churchill Knight had breached the managed service company (MSC) law.
This legislation seeks to stop company directors benefiting from paying typically lower corporate taxes and dividend taxes over employment taxes — if the company is controlled by another party, like an accountant or tax adviser.
If HMRC categorises a firm as an MSC provider it deems all its clients as users of an MSC and levies PAYE and national insurance on any income earned by the contractors’ businesses.
Tom Edwards, operations director, said: “I don’t feel like it’s an attack on us. It’s an attack on the industry and on contractors who operate their own limited company.”
The dispute is highly likely to go to the tax tribunal.
Seb Maley, chief executive of Qdos, an advisory firm, said an HMRC tribunal win would set a precedent. “It’s certainly a danger for contractors and accountants to be aware of.”
An HMRC victory would have “huge implications” for advisers providing services to contractors, added Chris Bryce, chief executive of the Freelancer & Contractor Services Association. The body independently accredits contractor specialist firms, including Churchill Knight & Associates.
Bryce defended the FCSA’s accreditation of the firm saying its vetting process, including for MSC compliance, had been thorough. He said Churchill Knight & Associates was operating no differently from an estimated 150 contractor accountancy firms in the UK — used by hundreds of thousands of individuals.
On March 15, HMRC sent letters to the firms’ clients, demanding income tax bills for 2017-18, ranging from £14,000 to £50,000, are paid within 30 days. National insurance liabilities are set to follow as will bills for later years, HMRC added.
The letter stated that Churchill Knight & Associates met three out of five features consistent with being an MSC.
First, it “benefits financially” from the provision of services by contractors by charging a yearly fee. Second, it “influences or controls” how they received payments by issuing a yearly statement of how much individuals would receive from their company and dividing and spreading this over 12 months. People could only change this by contacting the firm, HMRC said. Finally, HMRC said Churchill Knight & Associates “influences or controls” the finances and activities of contractors’ businesses by requiring them to use an online portal the firm developed and that there is “no independence from the portal”.
One person who received the letter and wished to remain anonymous said he and his wife had been “totally blindsided” by it. If HMRC issues bills for the past five years, he will have a liability of more than £100,000. “The impact on us is extremely stressful,” he said.
The contractor said he felt Churchill Knight & Associates had performed normal accountancy practices for him, including bookkeeping.
He was “confident” he could argue his case successfully. But the prospect of the dispute taking up to two years before reaching tribunal was difficult for everyone affected.
People who work like employees must pay tax like employees. The managed service company rules prevent an intermediary company setting up a structure that facilitates tax avoidance
Churchill Knight & Associates has taken legal advice and written to HMRC to dispute its findings. It is supporting clients to appeal against the decision and is running a help desk, which at its peak has been staffed between 6am through to 2am.
Edwards told FT Money HMRC had misunderstood its processes. He said the firm had no influence or control over how clients manage their limited companies or take dividends from it. The firm did not financially benefit from clients, but charged a fee for services, which is normal practice. He added that people can transfer in and out of its in-house portal and that it had clients who did not use the portal to manage their limited companies.
Edwards added that approximately a third of clients which HMRC said it had notified about tax liabilities had not received them. The tax liabilities are a legal notice and if not appealed within 30 days will become due.
The “disregard” for contractors’ mental wellbeing “was not on,” said Edwards, adding clients were complaining about not being able to eat, work or sleep because of the uncertainty.
“This can massively damage our reputation even though we haven’t done anything wrong. But we have to have clients’ mental welfare at the forefront.”
HMRC said it could not comment on specific taxpayers, but anyone with a query about an HMRC letter should contact it for help.
It added: “People who work like employees must pay tax like employees. The managed service company rules prevent an intermediary company setting up a structure that facilitates tax avoidance.
“We will take action where we find such structures being used, to ensure the right tax is paid. Any action follows considerable evidence gathering and expert advice.”
If HMRC succeed with this case then, it can be expected any clients of accountants offering a portal to limited companies to help manage their expenses, dividends and submissions can expect a huge tax bill. You can also expect accountancy firms to be hit hard too.
Feels very short sighted and could do a lot of damage.
Bob owns 10%
Dave 20%
Accountant 70%
When you issue gains or dividends it’s supposed to be spread based on ownership. Under MSC manipulation accountant gets 0, bob 10 and Dave 20.
What am I misunderstanding? It seems like the accountants tried to misuse MSC which is not designed to give individuals tax breaks.
Also these individuals have realized gains, these taxes aren’t fines. They will be a 50k tax bill on gains of 400k or so.
You fucked around and found out. HMRC don’t fuck about with us plebs.
The article looks like written by someone who doesn’t know how taxes work.
If one man band pays themselves dividend – it comes from profit on which Corporation Tax is paid. The system has been changed in 2017, so that the tax output of such arrangement is very much on par with PAYE. Given that NI is not hypothecated, there isn’t really any loss to the tax man and HMRC was never able to prove it.
Now, the reason why this is going is because of the scale of corruption in the treasury. Big IT corporations are upset that they are not in control of the talent and that these small businesses offer better quality and rates to their customers.
When contracting is finally finished, people will have no choice but to work as employees to these corporations and no longer be in charge of their own training and specialisation. That means the chances that they’ll form competition to these companies become limited and that is what it is about.
The constant lies and misrepresentations about contractors in the legacy media are upsetting, as people get false idea that hard working people are somehow the baddies, where in fact it is the opposite.
I wish HMRC was so diligent in pursuing who are actually evading taxes, but why would they bite their donors?
Good – I remember when all the Contractors at my old job found out about a big tax loophole being closed – they immediately started scrabbling to evade the tax another way.
They were earning £300+ a day but declaring they only earned <£12K and the rest was ‘the company’ – a company which consisted entirely of themselves.
We normal employee scrubs were paying more tax than these minted bastards.
I’ve always wondered how they went about evading tax after that.
5 comments
HM Revenue & Customs has sent income tax bills of up to £50,000 to 1,000 contractors after accusing their accountancy firm of breaking tax rules, in a move experts warn could impact dozens of accountants and hundreds of thousands of freelancers.
In March, HMRC accused Churchill Knight & Associates, a specialist accountancy firm, of falling foul of legislation designed to ensure contractors take responsibility for running their own limited companies.
In letters sent to the firm’s clients, seen by the FT, HMRC said Churchill Knight had breached the managed service company (MSC) law.
This legislation seeks to stop company directors benefiting from paying typically lower corporate taxes and dividend taxes over employment taxes — if the company is controlled by another party, like an accountant or tax adviser.
If HMRC categorises a firm as an MSC provider it deems all its clients as users of an MSC and levies PAYE and national insurance on any income earned by the contractors’ businesses.
Churchill Knight & Associates strenuously denied HMRC’s allegation.
Tom Edwards, operations director, said: “I don’t feel like it’s an attack on us. It’s an attack on the industry and on contractors who operate their own limited company.”
The dispute is highly likely to go to the tax tribunal.
Seb Maley, chief executive of Qdos, an advisory firm, said an HMRC tribunal win would set a precedent. “It’s certainly a danger for contractors and accountants to be aware of.”
An HMRC victory would have “huge implications” for advisers providing services to contractors, added Chris Bryce, chief executive of the Freelancer & Contractor Services Association. The body independently accredits contractor specialist firms, including Churchill Knight & Associates.
Bryce defended the FCSA’s accreditation of the firm saying its vetting process, including for MSC compliance, had been thorough. He said Churchill Knight & Associates was operating no differently from an estimated 150 contractor accountancy firms in the UK — used by hundreds of thousands of individuals.
On March 15, HMRC sent letters to the firms’ clients, demanding income tax bills for 2017-18, ranging from £14,000 to £50,000, are paid within 30 days. National insurance liabilities are set to follow as will bills for later years, HMRC added.
The letter stated that Churchill Knight & Associates met three out of five features consistent with being an MSC.
First, it “benefits financially” from the provision of services by contractors by charging a yearly fee. Second, it “influences or controls” how they received payments by issuing a yearly statement of how much individuals would receive from their company and dividing and spreading this over 12 months. People could only change this by contacting the firm, HMRC said. Finally, HMRC said Churchill Knight & Associates “influences or controls” the finances and activities of contractors’ businesses by requiring them to use an online portal the firm developed and that there is “no independence from the portal”.
One person who received the letter and wished to remain anonymous said he and his wife had been “totally blindsided” by it. If HMRC issues bills for the past five years, he will have a liability of more than £100,000. “The impact on us is extremely stressful,” he said.
The contractor said he felt Churchill Knight & Associates had performed normal accountancy practices for him, including bookkeeping.
He was “confident” he could argue his case successfully. But the prospect of the dispute taking up to two years before reaching tribunal was difficult for everyone affected.
People who work like employees must pay tax like employees. The managed service company rules prevent an intermediary company setting up a structure that facilitates tax avoidance
Churchill Knight & Associates has taken legal advice and written to HMRC to dispute its findings. It is supporting clients to appeal against the decision and is running a help desk, which at its peak has been staffed between 6am through to 2am.
Edwards told FT Money HMRC had misunderstood its processes. He said the firm had no influence or control over how clients manage their limited companies or take dividends from it. The firm did not financially benefit from clients, but charged a fee for services, which is normal practice. He added that people can transfer in and out of its in-house portal and that it had clients who did not use the portal to manage their limited companies.
Edwards added that approximately a third of clients which HMRC said it had notified about tax liabilities had not received them. The tax liabilities are a legal notice and if not appealed within 30 days will become due.
The “disregard” for contractors’ mental wellbeing “was not on,” said Edwards, adding clients were complaining about not being able to eat, work or sleep because of the uncertainty.
“This can massively damage our reputation even though we haven’t done anything wrong. But we have to have clients’ mental welfare at the forefront.”
HMRC said it could not comment on specific taxpayers, but anyone with a query about an HMRC letter should contact it for help.
It added: “People who work like employees must pay tax like employees. The managed service company rules prevent an intermediary company setting up a structure that facilitates tax avoidance.
“We will take action where we find such structures being used, to ensure the right tax is paid. Any action follows considerable evidence gathering and expert advice.”
If HMRC succeed with this case then, it can be expected any clients of accountants offering a portal to limited companies to help manage their expenses, dividends and submissions can expect a huge tax bill. You can also expect accountancy firms to be hit hard too.
Feels very short sighted and could do a lot of damage.
Bob owns 10%
Dave 20%
Accountant 70%
When you issue gains or dividends it’s supposed to be spread based on ownership. Under MSC manipulation accountant gets 0, bob 10 and Dave 20.
What am I misunderstanding? It seems like the accountants tried to misuse MSC which is not designed to give individuals tax breaks.
Also these individuals have realized gains, these taxes aren’t fines. They will be a 50k tax bill on gains of 400k or so.
You fucked around and found out. HMRC don’t fuck about with us plebs.
The article looks like written by someone who doesn’t know how taxes work.
If one man band pays themselves dividend – it comes from profit on which Corporation Tax is paid. The system has been changed in 2017, so that the tax output of such arrangement is very much on par with PAYE. Given that NI is not hypothecated, there isn’t really any loss to the tax man and HMRC was never able to prove it.
Now, the reason why this is going is because of the scale of corruption in the treasury. Big IT corporations are upset that they are not in control of the talent and that these small businesses offer better quality and rates to their customers.
When contracting is finally finished, people will have no choice but to work as employees to these corporations and no longer be in charge of their own training and specialisation. That means the chances that they’ll form competition to these companies become limited and that is what it is about.
The constant lies and misrepresentations about contractors in the legacy media are upsetting, as people get false idea that hard working people are somehow the baddies, where in fact it is the opposite.
I wish HMRC was so diligent in pursuing who are actually evading taxes, but why would they bite their donors?
Good – I remember when all the Contractors at my old job found out about a big tax loophole being closed – they immediately started scrabbling to evade the tax another way.
They were earning £300+ a day but declaring they only earned <£12K and the rest was ‘the company’ – a company which consisted entirely of themselves.
We normal employee scrubs were paying more tax than these minted bastards.
I’ve always wondered how they went about evading tax after that.