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From April 2007, managed service companies (MSCs), i.e. composite companies and managed personal service companies, will no longer fall within the IR35 legislation but will be required to operate PAYE and NICs on payments made to workers, as if they were the employer.
Among the issues raised in HMRC's document Tackling Managed Service Companies was the ability of MSCs to avoid paying assessments of tax and NICs by closing down the company and moving the workers to a new MSC. In a new document, Managed Service Companies – Transfer of Pay as You Earn and national insurance contributions debts, HMRC illustrates the problem of collecting tax and NICs debts with an example drawn from its compliance activity.
"Several composite companies, administered by an MSC scheme provider, were reviewed by HMRC. The review raised concerns about the application of the Intermediaries legislation and established that further tax and NICs were due. The MSC scheme provider set up a new set of composite companies. The composite companies under review ceased to trade on a Friday, the new composite companies took on the workers the following Monday, and the workers continued as if nothing had happened. Because of their lack of assets, HMRC was unable to collect the tax and NICs due from the old composite companies. Composite companies are separate legal entities making it impossible for the liability of the company to be transferred to the MSC scheme provider or the workers." |
HMRC's new document describes the operation of new draft legislation that, where HMRC makes an assessment of tax and NICs that should have been deducted by the MSC from payments made to an individual, will allow the debt to be collected from a third party. Such third parties are defined as
- a director or other office-holder, or an associate, of the MSC,
- the scheme provider,
- a person who (directly or indirectly) has encouraged, facilitated or otherwise been involved in the provision by the MSC of the services of the individual, and
- a director or other office-holder, or an associate, of a person within paragraph (b) or (c).
The wording at point (c) would bring into the scope of the legislation:
- an employment agency that advises workers approaching it for work to incorporate and tells them to use a particular scheme provider, but not an agency that simply provides a worker to an end client and that did not know and could reasonably not be expected to know the worker was operating through an MSC.
- an end client who told workers that they had no choice but to incorporate through an MSC or offered higher rates of pay to encourage workers to move to an MSC, but not an end client who used workers from an employment agency without knowing whether the workers were operating through MSCs.
- workers in an MSC who are aware that they are providing their services through the MSC.
However, professional advisers, such as accountants and lawyers, are excluded from the scope of the legislation.
Only if the debt cannot be recovered from the MSC will HMRC move to issue a Transfer Notice against a third party - initially those listed at point (a) or (b) above. Only if it is either impossible or impracticable to recover from those parties will the debt be transferred to those at point (c). The legislation sets time limits for transfers and provides an appeal procedure.
Interested parties are invited to comment on the draft legislation.
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Further information:
Managed Service Companies - Transfer Of Pay As You Earn And NICs Debts
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