Managed Service Company legislation - Spotlight 32
06 February 2018
HMRC ‘Spotlights’ warn about certain tax avoidance schemes that you should be aware of. HMRC has won a case in the First-tier Tribunal (FTT) involving attempts to avoid PAYE Income Tax and Class 1 National Insurance Contributions (NICs) on employment income.
HMRC successfully argued that the managed service companies (MSC) legislation (Chapter 9 of part 2 of the Income Tax (Earnings and Pensions) Act 2003 and equivalent National Insurance contributions legislation) applied to arrangements established and run by a third party - Costelloe Business Services Limited.
Following an appeal, the Upper Tribunal (UT) agreed with the original FTT decision that the appellant’s companies were operating as MSCs. The FTT recently granted the appellant’s leave to appeal.
Where a company is set up to provide a worker’s services to an engager and the MSC legislation applies, amounts paid to an MSC for those services that are not already subject to PAYE Income Tax and Class 1 NICs (for example, share dividends), are treated as employment income.
HMRC’s firm view, now supported by the tribunal decision, has always been that these types of arrangements do not work.
HMRC continues to open enquiries into users of similar arrangements that include the provision of workers in many different industry sectors, including road haulage, healthcare and education. HMRC will investigate and challenge these arrangements through every route open to it (including litigation) and seek full settlement of the tax due, plus interest and penalties where appropriate.
If any part of the tax and NICs are irrecoverable, HMRC will transfer unpaid debts to others, including the service company’s directors, the MSC provider and the MSC provider’s directors and associates. All are jointly and severally liable for the debts.
Promoters should carefully consider the Disclosure of Tax Avoidance Scheme (DOTAS) rules to determine if the arrangements they are marketing should be declared to HMRC. HMRC’s DOTAS taskforce will closely examine whether DOTAS should apply to individual cases.
HMRC is relentless in closing down avoidance schemes and encourages users of similar products operated to settle their outstanding tax or NICs enquiries now. If you’re ever tempted to enter an avoidance scheme, remember that you can end up significantly worse off. If the scheme looks too good to be true, it almost certainly is.
You can read the full guidance covering this case on GOV.UK.