Accounting firms could “lose credibility” from MSC crackdown

Accounting firms providing specialist services to contractors should be wary of jeopardising their position within the market as HMRC pursues a compliance campaign against managed service company (MSC) providers, according to David Harmer, associate director at Markel Tax.

“The consequence is that they [accounting firms] lose credibility within the market, and I think that has a knock-on effect for all accountancy providers.”

On March 15, HMRC distributed income tax bills of up to £50,000 to 1,000 contractors in the UK, in addition to letters accusing their accountancy firm, Churchill Knight, of breaking MSC legislation.

Portsmouth-based accounting firm Boox was subject to similar allegations. Both firms have denied HMRC’s claims.

“The whole purpose of the MSC legislation was that you had a number of workers going through companies and they didn’t know how to manage and run their own company,” says Harmer.

“The problem in this case is that, as far as the revenue is concerned, Churchill Knight and Boox have stepped across the line from an accountancy service into controlling and managing.”

Just one piece of MSC-related case law currently exists. In May 2016, HMRC was victorious in its pursuit of Costelloe Business Services (CBS), an advisory firm accused of being an MSC that encouraged tax avoidance.

According to HMRC, the total tax protected in this case amounted to £378,000. CBS denounced the verdict, arguing that it was not “involved with” the personal services companies among its clients.

Harmer goes on to acknowledge the inherent “danger” posed to the contracting industry as a result of HMRC’s latest compliance push, arguing that confidence on both the buy and sell side could wane.

“The danger is that it’s going to make contractors very nervous about accountants in general, and it’s going to make accountants nervous about the services they provide

“I do worry that the bona fide accountants of this world may have knee jerk reactions, and equally contractors will have knee jerk reactions about their accountant.”

Practical steps needed for accounting firms

With that danger in mind, Harmer argues that MSC providers should see HMRC’s actions as a warning and take steps to safeguard themselves, particularly when it comes to brand and image.

“For any accountant, I’d be saying job number one is to look at your marketing literature and how you’re selling the services. If you’re marketing yourself as ‘come to us and we’ll do everything for you’, you’re going to put yourselves quite high up on the revenue’s hit list.”

Harmer says that HMRC is actively looking at how firms are presenting their service offerings as part of its campaign to identify potential offenders.

“I think how you show yourself to the outside world has a massive impact.”

But equally important, Harmer says, is firms ensuring they have the authority to carry out the services they’re In Partnership Withoffering. This is heavily target under the MSC legislation, he notes.

“This can slip a lot because quite often we see accountants sign an engagement letter and then look at it a year later and realise they’re doing extra things.”

But the control of money and receipt of payments is perhaps the most critical area that firms need to audit, Harmer argues, warning that misdemeanours in this area could be a “big red flag to the revenue.”

“With the IR35 reforms, we were seeing a lot of models where the accountancy firm was almost inserting itself into the contractual chain and becoming the fee payer to give the agency some protection.

That now means that the practice is receiving the money before the contractor, and if they start taking their fees out of that money, all of a sudden they’ve got control of the company’s finances.”

With this in mind, Harmer argues that firms should resist the “urge to automate” and remain focused on “what they do best” – providing bespoke tax and accountancy advice.

“I think accountants feel this pressure to keep up with technology and try to automate everything. The problem with that is, the more automated things are, the closer you step towards MSC legislation.

“Concentrate on what you do best – bespoke advice that is tailored to the client – rather than trying to do one of these one-size-fits-all package deals.”

If you are in any doubt about your practice offering please contact Markel Tax –  we can provide a full MSC review to give you peace of mind and recommend practical changes to avoid HMRC attack.