Avalanche of MSC debt transfer notices in last tax year
Following a Freedom of Information request by Recruiter magazine, it has been revealed that HMRC issued 981 debt transfer notices in the year ended 5th April 2013 in an attempt to recover debts of nearly £1.5 million. This represents a huge increase in comparison to the two previous years; nil in 2011/12 and 142 in 2010/11.
The Managed Service Company (MSC) legislation contained in S.688A ITEPA 2003 was introduced to address the historical problem of managed service companies (MSC) escaping their PAYE and NIC debts by simply winding up their companies or ceasing to trade and shifting workers to a new MSC, made easy by the fact that MSCs generally have no tangible assets. The legislation therefore enables HMRC to seek recovery of the PAYE and NIC liabilities from other parties where it is not possible to collect such from the MSC within a reasonable period.
HMRC would consider an MSC with no assets that offers to pay a £50,000 debt in instalments of £500 per month to be irrecoverable within a reasonable period.
Categories
There are four categories of person to whom a debt can be transferred:
- The director, or other office holder or associate of the MSC;
- The MSC Provider (MSCP), or the director, or other office holder or associate of the MSCP;
- A person who directly or indirectly has encouraged or been actively 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 (other than an individual) who is within paragraph (2) or (3).
Although all persons in the above categories are jointly and severally liable for the debt it does not mean that all persons will be required to pay the debt.
Transfer notices must be issued firstly to persons in category (1) but where the debt cannot be recovered from such persons, HMRC will then issue Transfer Notices to persons in category (2). In practice however HMRC will consider the financial position and ability to pay of all persons in the first two categories simultaneously. If there are no reasonable prospects of recovering the debt from those in category (1) then Transfer Notices will be issued to all persons in categories (1) and (2) at the same time.
Before Transfer Notices can be issued to persons falling in categories (3) and (4) HMRC have to certify that it must be impracticable to recover tax and NICs from those in the first two categories. Legislation does not define “impracticable” but where a person is resident outside the UK and has no UK assets or a person is insolvent then this will satisfy that definition.
There is an exemption from category (3) for those providing legal or accountancy advice in a professional capacity and recruitment businesses. Activities that go beyond the provision of advice (accountants) and an agencies core business however will negate the exemption but it does not automatically mean that the debt transfer provisions will apply.
Transfer of debt provisions took effect from 6th August 2007 for MSCPs and directors of MSCs but from 6th January 2008 for other third parties. After a number of apparently inert years HMRC have now stepped out of the shadows as they believe that some MSCPs are using the MSC model to maximise contractors' income achieved in no small way through tax avoidance.
It is imperative that any contractor contemplating or even currently using the services of an MSCP understands the full tax implications because the consequences of getting it wrong could be disastrous.
Even if a company is an MSCP it does not automatically follow that the MSC rules will apply. This will depend on whether or not an MSCP is 'involved' with its client. Any contractor contemplating using an MSCP or currently using one and who is unsure of whether or not the MSC legislation may apply should seek immediate professional advice.
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