HM Revenue & Customs (HMRC) has issued new guidance warning freelancers, contractors and consultants about the risks associated with managed services companies (MSCs) – complex tax arrangements that can leave freelancers facing tax bills of up to tens of thousands of pounds.
The MSC legislation, introduced in 2007, aims to combat perceived tax abuses by freelancers who provide their services via limited companies set up primarily to avoid tax liabilities. These companies, controlled by a third party – often an accountant – are known as managed services companies. HMRC claim that self-employed people should not receive the tax benefits of running their own business if the business is actively managed by someone else and is only used as a means to reduce tax payments.
Under the MSC rules, if a freelancer’s work is deemed to be an MSC, HMRC will require that all income generated is subject to PAYE tax and National Insurance contributions. This could be equivalent to up to 40% of the income MSC has generated since its inception, once taxes, interest and potential penalties are applied.
The latest guidance, published on 21 November, highlights the significant risks faced by independent employees working via MSCs. Currently, in an ongoing case, more than 1,000 contract workers are under investigation by HMRC for breaching MSC legislation. Of the more than 100 contractors supported by tax compliance firm Qdos, the average tax liability tracked by HMRC is £57,000, coming to a combined total of £5.9 million.
Seb Maley, CEO of Qdos, stressed the importance of vigilance among freelancers: “HMRC are right to put the MSC legislation back on the radar of the hundreds of thousands of contract workers it could affect. These complex tax rules could leave freelancers They incur staggering tax bills, and often through no real fault of their own, these unsuspecting freelancers are advised to work through MSCs by third parties.
He added: “The problem with these rules is that freelancers who fall into MSCs have no incentive to avoid tax. Typically, they will hire an accountant who specializes in their industry and in forming limited companies. It’s unfair, but the fact of the matter is that if you fall In the trap of working through an MSC, it is possible for the tax office to claim up to 40% of everything you have earned through your company so far.
Self-employed workers are urged to review their working arrangements and seek professional advice to ensure compliance with HMRC regulations. The potential financial implications of being considered an MSC are significant and can have long-term impacts on the livelihoods of independent workers.
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