HMRC is also carrying out further enquiries into this area of taxation, compliance specialist Qdos can reveal, possibly signalling the start of widespread investigations among hundreds of thousands of contractors, their accountants and unsuspecting recruitment agencies.

Qdos CEO, Seb Maley, commented: “With the dust barely having settled on IR35 reform, contractors, their accountants and recruitment agencies are braced for another threat. This time it’s in the form of MSC enquiries, which pose a major risk to unsuspecting recruitment agencies.”

The MSC legislation was introduced in 2007 to combat perceived tax abuse by contractors who provide their services via a limited company, which is controlled by an MSC provider (MSCP).

HMRC argues that contractors should not receive the tax benefit of running their own business if the business itself is controlled by another party and only used as a vehicle through which to pay less tax. 

If a contractor is deemed to be an MSC (having used the services of an MSCP), HMRC will insist that all income generated by the MSC is subject to PAYE tax; this could, after tax, interest and possible penalties, equate up to 40% of income earned by the MSC since it was formed.

The effect of the MSC legislation is similar to that of IR35, but potentially much greater given the tax liability is likely to apply to the lifespan of a contractor business, rather than just one contract.

If the contractor is unable to pay this, liability travels up the labour supply chain. It means MSC impacts contractors, along with accountancies, recruitment agencies placing the contractor and, possibly, the business engaging the worker.

Maley added: “Latest developments show that HMRC is ramping up its compliance activity, pursuing what could amount to tens of millions of pounds overall. If contractors or their accountants can’t pay what could be anything up to 40% of turnover since the MSC was formed, recruitment agencies would be transferred the liability.

“Given it’s unlikely recruiters will have had little, if anything, to do with these arrangements in most cases, handing them a huge retrospective tax bill is entirely unjust. Needless to say, the implications of widespread MSC investigations could be financially devastating for all parties involved and send shockwaves through this sector.”

• Comment below on this story. Or let us know what you think by emailing us at [email protected] or tweet us to tell us your thoughts or share this story with a friend.