Recruiters or MSP’s seen to be promoting IR35 Tax loss insurance are leaving themselves vulnerable to the MSC legislation, giving rise to huge liabilities and even insolvency risk.
A worrying trend
In recent Client work, I’ve reviewed several Contracts from both Recruiters and MSP’s that have made the purchase of tax loss insurance a condition of working outside IR35 (Off-Payroll legislation).
This is akin to promoting the insurance, crucially satisfying two criteria of the MSC legislation and placing the Recruiter or MSP in the firing line for a significant liability. There are solutions to the IR35 headache for Clients and Recruiters, tax loss insurance isn’t one of them.
As a matter of law, the fee-payer (usually the Recruiter) is responsible for any underpayment of income tax and National Insurance contributions if HMRC successfully challenges an outside IR35 determination.
Recruiters have sought to mitigate this risk by requiring contractors to indemnify this liability via a tax loss insurance policy.
Ethics aside, this practice is fraught with legal risk which may be unclear to the non-legally trained IR35 advice community and their clients.
Why the MSC Legislation is so important
Here’s the key legal points, it’s a little dry, but it’s important, so please read on.
- The Managed Service Companies (MSC) legislation can be found in Chapter 9 of the Income Tax (Earnings and Pensions) Act 2003.
- An MSC provider is ‘a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals’, for example, a Recruiter or MSP.
Providing recruitment services in isolation is fine, there is an exception made for Recruiters in section 61B(4). Unfortunately this exception is then removed if the MSC provider ‘gives or promotes an undertaking to make good any tax loss’ by virtue of section 61B(5)(a).
In very simple terms, if a Recruiter or MSP either promotes or requires tax loss insurance to be taken out by the Contractor, they are putting themselves in harms way of the MSC legislation.
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So why worry?
The legislation has a very nasty sting, potentially even fatal.
If a Recruiter or MSP becomes liable under the MSC legislation, it may require them to pay National Insurance and Income Tax contributions for all relevant engagements. That could apply to hundreds of Contractors, enough to make most Recruiters insolvent.
The most relevant case in recent times is the Court of Appeal’s judgment in Christianuyi Ltd & Ors v The Commissioners for Her Majesty’s Revenue and Customs [2019] EWCA Civ 474. It is worth reading up on the background.
So what are the options?
If you’re a Recruiter or MSP providing Contractors outside IR35, you mustn’t either promote or make tax loss insurance a requirement of the engagement.
Don’t align yourselves with any Insurance providers that could infer promotion as well.
If you want to solve the IR35 headache for your Clients, the only way is to manage it correctly and robustly, ensuring you engage with experienced IR35 legal resources.
IR35 presents a real opportunity for your Clients, but one you need to manage carefully.
The only way to solve IR35 for your clients is to operate a robust process.