Since the introduction of the Managed Service Companies (MSC) legislation in 2007, little publicity has been given to HMRC activity in this area during the last 5 years. This is because there has not been a lot to write home about and any significant tax case has yet to materialise. Indeed, the way the legislation was designed and written meant that HMRC had to do very little in those earlier years due to the major providers of composite company solutions calling it a day as soon as the law hit the statute books.
It appears though that something has stirred the sleeping giant as MSC enquiries have substantially increased in number since April 2012. Following two Freedom of Information requests, recruitment law firm, Lawspeed, were able to glean that the number of live MSC enquiries as at April 2012 stood at 216. Seven months down the line however and a further 644 enquiries were initiated, taking the total to 860 as at November 2012.
Since April 2011, 142 third party debt transfer notices have been issued.
What is an MSC?
An MSC is basically a personal service company (but can also be a partnership) with the added requirement that an MSC provider (MSCP) is involved with that company.
What is an MSCP?
An MSCP is defined as a “person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.”
Not surprisingly, 'promotion' and 'facilitating' have wide meanings.
Involved
Just because a person is an MSCP does not automatically mean that their corporate clients are MSC's and that the legislation applies. The key test is whether or not the MSCP is 'involved' with their client which is determined by reference to any one of five specified activities. Three of these tests are mainly to do with the MSCP having influence or control over its client's business, with the other two being providing or promoting tax loss insurance and the way the MSCP charges its fee.
Exemptions
Legislation specifically exempts those providing legal or accountancy services, where they are professional qualified and governed by a regulatory body. Employment businesses and agencies are also specifically excluded provided they do not stray from their core business of placing work seekers with end clients.
Where either of these groups stray into MSCP territory then the exemption can no longer be relied upon.
Consequences of the legislation applying
Where the MSC legislation applies then basically all the income received by the MSC is treated as employment income subject to PAYE and NIC. Quite a blow if the majority of the client's profits have been extracted by way of dividends.
The resultant PAYE and NIC is calculated by reference to the 'deemed employment payment'. Unlike the IR35 deemed payment calculation there is no 5% flat rate deduction and it is extremely difficult to claim ordinary employment expenses. In fact falling within the IR35 legislation is more preferable!
Third party debt transfer
Once the tax and NIC debt has been established HMRC will seek payment from the MSC but where the Revenue certify that an MSC's PAYE and NIC debt is irrecoverable from the MSC they can seek collection from a number of parties including the director of the MSC, the MSCP or its directors and even agencies if they have been colluding with the MSCP in some way.
It is this part of the legislation that is the real sting in the tail.
HMRC strategy
HMRC's specialist MSC unit will initially target the MSCP and carry out an investigation into its business and the way it interacts with its corporate clients. A sample of MSC's will be looked at and if the MSCP is involved with all of those clients in an identical fashion then HMRC can assume that all other clients are MSC's.
HMRC will then issue enquiry notices to each of the MSC's which also notifies of the PAYE and NIC arrears. Whilst the MSC has the right of reply the chances of putting up a successful defence are very slim unless they can prove that their relationship with the MSCP was distinctly different to that which HMRC has already established.
Anybody who believed HMRC had lost interest in this legislation may need to readjust their thinking.
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