Revenue to raid a new breed of MSCs
It will go live today as 'latest news' on HMRC's website, but experts say an update on MSC laws is actually the last word from the taxman before he raids a number of companies.
In its posting, HMRC will say that since anti-avoidance rules for Managed Service Companies were introduced last year, a new breed of intermediary has flourished.
These companies, sometimes based overseas, market themselves to UK workers who provide services to clients but do not want the hassle of running their own business.
In their blurb, they say they are unaffected by MSC laws, which levy PAYE & NICs on workers' incomes, because its provider is an officer or partner of the intermediary.
Consequently, they claim their operation has no separate MSC provider and argue that, as a result, workers using the entities they offer are exempt from the legislation.
The taxman will today disagree: "HMRC's position is that being an officer/partner in a service company does not preclude that person from being an MSC Provider."
Suggesting a clampdown on these outfits is imminent, it will add, "HMRC will now look for suitable cases to investigate and, where appropriate, challenge and litigate."
Last night, a legal expert on the MSC legislation said it was difficult to see how a scheme provider being, or claiming to be, either an officer or partner could be exempt.
"If you want the benefit of the salary/dividend split, you have to be prepared to take the responsibility of operating and managing the company [yourself]", said Roger Sinclair of Egos, addressing workers..
"If you want someone else to run it - particularly someone who has a profile in the marketing of such arrangements, then you get close to the risk of being an MSC".
In its update, HMRC will say the law will not hit "individuals genuinely in business on their own account" who supply their services via "a company which they control."
Despite a lack of emphasis that Mr Sinclair said was HMRC "scaremongering," the Revenue update explains that agencies which do not point workers to MSC providers will be exempt.
It will state: "HMRC will only consider transferring debts to an Employment Business both if debts are irrecoverable from Service Provider or workers, and there is evidence that the EB was actively involved in the provision of the workers' services through a Managed Service Company."
While this is true, Mr Sinclair said the words "Managed," and particularly "actively" should be in bold as HMRC's guidelines to the rules say recruiters must have "demonstrably" non-complied.
Even so, HMRC's statement echoes the rules' FAQs that say recruiters carrying on their core business of placing workers will not be within their scope for the transfer of unpaid tax.
Nor does the legislation apply to employment agencies which "undertake services which are merely ancillary to the core business", the Revenue has said, in MSC guidance note 4.2.
Also absent from today's update, HMRC has advised recruiters they do not need to prove a work-seeker's outfit is an MSC or Personal Service Company if it was already set up upon contact.
For omitting such details which reduce recruiters' exposure to being liable for unpaid employment taxes, HMRC is 'scaremongering them into policing the law' for its officers.
Mr Sinclair added: "What HMRC seem to want is to achieve a situation where no-one will deal with MSCs because of the fear of transfer of debt - but the problem is that the more they use such scaremongering tactics, the more they interfere with the willingness of third parties to deal with companies that are genuinely not MSCs."
Under the law, an unpaid tax debt would be transferred to the company that provided the MSC, its director, office holder or associate of the MSC provider.
If the tax is not recoverable from these parties, the Revenue will then transfer the demand to the final third-party recipients, including recruitment agencies and end clients.
However, individuals should note the transfer rules only take effect when their debt of employment taxes is unable to be paid by the director of the MSC, typically their own outfit, within 3 months.
Explaining the need for the legislation, the state has said workers who use MSCs – outfits managed by third parties – do not exercise control over such companies and therefore are employees, so must pay tax accordingly.
Dec 3, 2008