Is HMRC ‘cruelly seeking to transfer debts’ to MSC contractors?

When Camino Alta principal John Whelan remarked that “HMRC is cruelly seeking to transfer debts to individuals” in the Churchill Knight (CK) and Boox Managed Service Company (MSC) cases, he urged chancellor John Healey to act at Budget 2026 on October 28th. But debt transfer was written into the 2007 Managed Service Company legislation from the outset, and contractors’ HMRC determinations weren’t transfers at all, writes former HMRC compliance specialist Tyra Ali, consultancy manager at Markel Tax.

As MSC specialists for the last 19 years, we often find ourselves advising that the main issue is not whether debt transfer exists. Rather, it is whether a provider meets the statutory definition of an MSC provider (MSCP), whether it was “involved” with the company, and whether the company itself meets the conditions for being an MSC.

Where HMRC considers those conditions met, it gives chase. Just last week (w/c September 21st), one contractor shared that they face an alleged £52,700 NICs-and-interest bill, with court action threatened unless an HMRC standstill agreement is entered into by October 23rd.

Were the original Boox/CK MSC determinations by HMRC debt transfers?

No. HMRC issued the April 2022 determinations to contractors’ own limited companies because it considered those companies were themselves MSCs, and therefore liable under the Managed Service Company legislation.

Contractors often saw these original PAYE determinations and National Insurance decisions as HMRC transferring the MSCP’s debt to them. Technically, that is not what happened.

The Regulation 80 determinations and “Notices of Decision” established those companies’ alleged liabilities. They were not debt transfer notices.

That distinction matters. A contractor could still face personal liability if the statutory conditions are met and a debt transfer notice is later issued to them as a director or office-holder of the MSC.

What is MSC debt transfer?

MSC debt transfer is an HMRC recovery mechanism that allows an MSC debt to be transferred to specified persons where HMRC believes the statutory conditions are met.

Parliament did not simply create the MSC rules. It deliberately added debt transfer provisions so liabilities could still be recovered where the MSC itself could not pay. These debt transfer provisions can be found in section 688A of the Income Tax (Earnings and Pensions) Act 2003 and regulations 97A–97F of the PAYE Regulations 2003.

Why are there debt transfer rules in the MSC legislation?

Parliament included debt transfer out of concern that the MSC legislation would become ineffective if a small contractor company became insolvent or was dissolved before HMRC could recover the debt.

Debt transfer was always an integral part of the legislation, rather than a power created by HMRC or brought in later. Whether that was good policy remains open to debate.

Who can HMRC transfer MSC debt to?

HMRC can recover an MSC’s unpaid PAYE and National Insurance from at least four groups beyond the MSC itself, where the HMRC-accused ‘MSC’ cannot pay:

1. The MSC’s directors
2. The MSCP
3. Directors or office-holders of the MSCP
4. Certain other connected parties.

Has HMRC issued MSC debt transfer notices, and to whom?

In one of the ongoing MSC disputes, it became known that a wider group of contractor companies did not appeal their original HMRC determinations. It is currently unknown whether HMRC issued debt transfer notices in every case. However, it then emerged that one contractor company that failed to appeal its PAYE and NIC determinations had been issued with HMRC debt transfer notices. These notices were in respect of that company’s alleged liability to the accountancy provider and to a director of that provider.

But the debt transfer notice was not issued to the contractor company’s director even though the legislation allows transfer to such a director where the relevant statutory conditions are met. While some contractor limited company directors might be reassured, providers and their directors should not assume that the HMRC liability will necessarily remain with the contractor company.

Why was the MSC legislation even introduced?

The MSC legislation was introduced through the Finance Act 2007 to tackle managed and composite company arrangements, and in particular the role played by MSC providers.

In the early 2000s, there was concern about how many of these arrangements were being set up. They gave workers the tax advantages of a limited company without necessarily having to run that company themselves.

Providers would set up the companies and handle the admin, payroll, invoicing and funds, while the worker carried out the work.

How did the Boox and CK MSC cases come about?

The MSC rules sit within the employment intermediary rules, which include IR35. But within the contracting market, HMRC primarily focused on IR35, with the MSC legislation almost in the background.

But HMRC’s landmark MSC legislation victory in Christianuyi Ltd and others v HMRC brought MSC into sharper focus, as it opened the door to further investigations.

Fast-forward to 2022, and HMRC issued many hundreds of determinations to contractor companies that used two accountancy providers, Churchill Knight and Boox.

Part of The App Accounting Group, Boox had its first tribunal hearing on June 15th 2026, while CK is yet to get its day in court, scheduled from November 11-27th.

Is HMRC's use of debt transfer ‘cruel’?

The claim that HMRC is being ‘cruel’ in relation to transferring debt sums up the frustration many contractors understandably feel.

Many of those caught up in current MSC disputes maintain that they were engaging what they believed to be ordinary accountancy services. This is where the debate becomes somewhat muddied.

Editor’s Note: The MSC legislation does say a person is not “involved” with a company merely because it provides accountancy services in a professional capacity (ITEPA 2003, section 61B(3)).

Is the problem HMRC’s approach, or the MSC legislation itself?

There is a tendency to combine criticism of HMRC’s application of the MSC legislation with criticism of the MSC legislation itself, but the two are not necessarily the same.

In particular, the 2007 legislation was deliberately drafted to allow recovery from providers and other connected parties where the statutory conditions are met. Whether that is fair remains open to interpretation, and whether it is “cruel” may depend on who parliament intended to bear the risk when tax liabilities cannot be recovered. For years, though, many contractors have assumed the answer was them.

The takeaway

For contractors, the more practical question than whether HMRC is being cruel on debt transfer is whether the MSC legislation applies in the first place and, if it does, whether HMRC has met the conditions for transferring the debt to a particular recipient. Those considerations should be first in contractors’ minds, perhaps even before whether they’ll be HMRC’s target for debt transfer, as recent developments suggest that the position may be more nuanced.

Contractor accountancy providers and others fearing HMRC’s ‘MSCP’ label might be wise to pay close attention to the question of HMRC’s recovery mechanism. The current Boox-CK disputes prove that the transfer provisions are far from hypothetical, and can expose providers, their directors and office-holders to liabilities arising from a contractor company’s affairs.