MSC bulldozer approach not permitted

Tribunal ruling may cause HMRC to re-think its approach in MSC enquiries

A firm providing accountancy services to contractors has won its appeal against penalties levied on it for not providing information on time to enable HMRC to ascertain if it was a Managed Service Company (MSC) Provider.

PML Accounting Ltd (PML) appealed against penalty notices totalling £4,560 for failure to comply with an information notice issued in November 2012.

In August 2012, HMRC wrote to PML stating that they were considering whether the arrangements existing between PML and its clients would fall within the scope of the MSC legislation and suggested a meeting followed by a review of PML’s records. Two months passed before Paul Hazell, the sole director of PML, replied stating that their own accountant, Hazell Minshall, would be dealing with the Revenue’s enquiries.

Losing patience with not having received a response to their initial letter, HMRC wrote again to PML in late October 2012 attaching a three and a half page list of information, covering the period April 2008 – April 2013, that they wished to examine. The documentation request was limited to a sample of 11 of PML’s 700 – 800 clients.

Having not received the information requested, HMRC issued PML with a para. 1, Schedule 36, Finance Act 2008 notice (Information Notice) in November 2012, giving PML until early January 2013 to comply or face a penalty. By agreement, the deadline date was extended to 28th February 2013.

According to Paul Hazell he had been working on 27th February 2013, through the night and into the next day to finish by noon of 28th February 2013 in order to assemble all the information and documentation. However, when he checked to confirm that a courier would be available, the courier company told him that they could not deliver to HMRC’s PO address. Hazell therefore telephoned HMRC to ask for a street address and maintained that he was given a street address in Sheffield.

That same day, Paul Hazell’s two year old daughter was badly injured in an accident at home and was hospitalised and placed under 24 hour surveillance. Due to her age the doctors thought it too dangerous to operate on her and decided it was safer to allow her wounds to heal naturally but this would require her parents to monitor her constantly over a few days. As Mrs Hazell’s health was poor, this became the sole burden of Paul Hazell.

On 28th February 2013, Hazell Minshall both faxed and posted a letter to HMRC to advise of the unfortunate circumstances surrounding the daughter.  HMRC were sympathetic and agreed not to levy a penalty but as the documents were ready for despatch they hoped that the accountants would be able to deliver these by the end of the week.

On 8th March 2013, Paul Hazell personally delivered 16 boxes of documents from Southampton to HMRC’s office in Sheffield. There was however still some documents missing which HMRC notified PML of on 15th March 2013. In particular, the Revenue could not find:

1. PML’s bank statements showing fees collected 6th April 2011 – 6th April 2013.

2. Bank statements relating to eight of PMLS’s sample clients.

3. PML’s records used to calculate salaries, dividends, taxes and other items for four of the sample clients.

4. PML’s fee invoices for four of the sample clients.

5. Payment notifications for four of the sample clients.

6. Bank mandates.

7. Sales invoices relating to five of the sample clients.

As such, HMRC issued an initial penalty of £300.

Further delays in supplying the outstanding information were caused by the illness of Paul Hazell’s father which led to HMRC imposing daily penalties of £20 in May 2013, increased to £30 per day in June, together with further daily penalties of £20 between June – September.

Following a request for a review of the penalties, the review officer upheld the fines.

The Tribunal concluded that the accident incurred by Hazell’s daughter was not a reasonable excuse for PML’s continued failure to deliver all the documents as by the time the tribunal commenced the missing information had still not been produced. In a similar vein, neither could the illness to Hazell’s father be regarded as a reasonable excuse.

However, the Tribunal found that the Information Notice did not comply with the requirements of the legislation, as it did not relate to PML’s tax position, but rather to the tax position of its clients. As such therefore the Information Notice was invalid and no penalties could arise for non-compliance.

If HMRC had wanted to determine whether PML was an MSC Provider (MSCP) to any of its clients then they should have done so by enquiring into the tax position of the clients. This could have been better achieved by issuing PML with a third party information notice, ie for the purposes of checking another person’s tax position.

The Tribunal distinguished the position of PML as an MSCP from an employer with a liability to account for income tax under PAYE. In the case of an employer, it has an actual liability to account for income tax in respect of remuneration paid to its employees. An MSCP does not have any liability to account for income tax in respect of fees earned by its clients as a liability can only arise in the event that an MSC defaults in the obligations that it owes HMRC, and then the MSCP may have a secondary liability for those obligations. The potential liability of PML accounting for tax under the MSC legislation was therefore considered too remote.

This ruling may cause HMRC to revise its approach in an MSC enquiry. Its trusted tactic of simply sampling a number of the MSCP’s clients to confirm whether or not the legislation applies to all those clients may not be lawful and it may be a case of the Revenue having to raise an enquiry into each and every client instead. This could prove to be a rather time consuming exercise but might not put HMRC off if there were rich pickings to be had.