1,000 contractors have received unexpected income tax bills from HMRC after accountancy firm Churchill Knight & Associates was accused of breaching managed service company (MSC) law. Contractors affected by the alleged breach received shock bills of as much as £50,000.
Churchill Knight & Associates was accused in March of breaching the law, which aims to ensure that contractors assume responsibility for the operation of their limited companies. This is so that company directors don’t pay lower rates of corporate and dividend tax if their company is controlled by a third party.
Clients of firms categorised as MSC providers are deemed to be users of an MSC, with PAYE and national insurance contributions (NICs) levied on income earned by their business. Churchill Knight & Associates has denied the allegation that it breached MSC law, with a tax tribunal thought to be likely.
In a letter to clients of Churchill Knight & Associates, HMRC said that the firm met three of five features to be classed as an MSC. Firstly, HMRC says the company financially benefits from providing contractors with services, for which it charges an annual fee. Secondly, the company is said to have “influence or control” over how clients receive payment, with payments divided over 12 months, unless the client contacts the firm to specify otherwise.
Thirdly, HMRC says that the firm “influences or controls” client finances and activities, by requiring them to utilise the company’s online portal. According to HMRC, Churchill Knight & Associates clients have “no independence from the portal”.
Churchill Knight & Associates has disputed the findings, claiming that HMRC has misunderstood how the firm operates, and said it will support clients in their appeals against the bills. Quoted in the Financial Times, Churchill Knight & Associates Operations Director Tom Edwards said that the move by HMRC was “an attack” on the company, the industry and on contractors operating limited companies.
Several figures from the contracting industry have commented on the situation, with some warning that it could set a dangerous precedent for contractors and their accountants. Freelancer and Contractor Services Association (FCSA) CEO Chris Bryce insisted that Churchill Knight & Associates operated no differently from around 150 similar UK accountancy firms and said the implications for advisers serving contractors would be “huge” were HMRC to win the case at tribunal.
