6

HMRC (Her Majesty’s Revenue & Customs) have announced that they are gearing up to mount an attack on Managed Service Companies (MSCs) based in the UK and offshore.

Background

For many years now HMRC has battled to try and stop what it perceives to be the unacceptable use of limited companies as a way for business owners and what it calls “workers” to save on their tax and national insurance bills.

It has always been legal for anyone to offer their services via a company they own and control themselves and for them to be taxed under PAYE and Corporation Tax legislation as appropriate. In situations where a business employed at least two or three staff and had a number of different clients there was no issue, and there probably still is no issue.

HMRCs Problem

About twenty years ago a number of consultants, primarily in the computer industry, started to leave their full-time jobs and having set up their own limited company then went back to work for the same company as an independent contractor. I know of people who left their salaried jobs on a Friday and went back to the same company on the Monday. This meant that they could claim lots of expenses not allowable as an employee and they could take most of their “salary” as a dividend from their own company. Not only did this avoided NICs but dividend income was taxed at a lower rate than salary. They could also “employ” their wife (or husband if appropriate) and make use of their tax free allowance or lower tax rate band. The result could be quite a substantial saving in the tens of thousands of pounds.

There were advantages too for the client company which now found that not only was it saving about 12% on Employer’s NICs but consultants enjoyed no employment protection or redundancy rights.

IR 35 Regulations

Alarmed by the huge loss in tax and NIC revenue HM Government introduced new regulations in April 2000. These have become known as IR35 (after the document number the regulations were issued under). The problem was that in trying to be fair and to avoid catching genuine businesses in the IR35 net the regulations were complex, costly and time consuming to administer, particularly as smart professional advisors came up with cunning ways to get around them.

You can find out more about IR35 here but in general if HMRC felt it applied to a particular company they would examine the contractual nature of the relationship between the worker and the client (“employer”) and any deemed earnings would be subject to PAYE and NICs.

Managed Service Companies

Faced with problems enforcing IR35 and the growth of various types of “managed service”, “umbrella” or “intermediary” companies HM Government introduced the Managed Service Company (MSC) regime about 18 months ago.

Typically these types of company – which can be based in the UK or offshore (the Isle of Man being a favourite location as you can register for VAT here) – contract with a client to provide the services of a (named) worker. They do this for many different workers and so claim to be real businesses. They usually pay the worker 85% of the fee received, the remainder being kept for running costs and local taxation. The payments are often termed “dividend” and so save NIC and are taxed at a lower rate.

HMRC claim that these are only shams with no purpose except to save tax and under the MSC regime all sums received by a worker (or an associate of the worker such as a wife or husband or child) as a result of participating in an MSC scheme are subject to PAYE and NICs irrespective of the nature of the relationship between the worker and the client.

Unlike the IR35 regulations where HMRC have to prove what the contractual relationship between the worker and the client is, under MSC it is the worker who has to prove he/she doesn’t owe any tax.

New Guidance

HMRC have now issued new guidance on a number of different structures where MSC legislation operates:

Intermediary companies claiming not to be MSCs

Since the introduction of the MSC regime, many intermediaries have attempted to circumvent the rules and claim that they are not MSCs. HMRC says it has taken counsel’s advice and now considers that intermediary companies are MSCs even if:

  • The MSC provider is an officer or partner of the intermediary.
  • The intermediary company is based outside the UK.

Tax status under CIS rules of intermediate companies and MSCs

  • When a construction worker receives payment via an intermediary (whether or not an MSC), the intermediary will be treated as the worker’s nominee. 
  • The CIS rules specify that in these circumstances both the nominee and worker must be registered for gross payment before a contractor may make payments gross to the intermediary on behalf of the worker. 

Employment businesses and agencies

HMRC will use its powers to transfer tax debts to employment businesses and agencies in accordance with its powers under the transfer of debt provisions. It confirms that obtaining a written assurance from the intermediary or the worker that the intermediary is not an MSC is not enough to guarantee protection from the transfer of debt provisions. The provisions will only be applied where there is evidence that the business or agency was actively involved in the provision of the worker’s services through the MSC and that the debt is irrecoverable from the MSC provider and the worker. An employment business or agency is not protected from the transfer of debt provisions simply by asserting that the company is an umbrella company

Conclusion

HMRC have clearly decided to make a big issue of this and anyone who is or has operated in this manner should be aware that HMRC have the right to claim tax, interest and penalties (up to 100%) on any unpaid tax or NIC since the time a worker started to operate via an MSC. They can also use legislation to transfer a tax debt from a company to the worker.

Finally – please be aware that the UK has tax exchange treaties with many countries including a new one with the Isle of Man which gives HMRC the right to obtain any information which may be relevant to taxation on application to the local tax authorities who may authorise HMRC to carry out a search or seizure themselves. Anyone failing to cooperate is committing a criminal offence.

If you are in this situation – get appropriate advice now.

6 Responses to “Warning: UK and Offshore Managed Service Companies Under Attack”

  1. Bernard says:

    Way I hear it is that things are gonna get even more difficult whoever wins the next election.

  2. James Green says:

    I wouldn’t wait for the end of IR35. I doubt Gordon Brown will abandon it and he looks unlikley to call a general election anytime soon. Even then it may be some time before the Tories scrap it – always assuming they will.

  3. Paul_76 says:

    Did you ever hear from Banksie? I use an umbrella too. All a bit worrying but if IR35 goes then so does this problem.

  4. James Green says:

    Hard to know until you tell me more. For example where do you live. Where do you work? If you use an offshore structure like this one where is it base?

  5. Banksie says:

    Hi there. This is a bit worrying for me. Who do you suggest I speak to?

  6. Rapid Lose Weight says:

    Great blog. Keep up the great work. Thanks again, Camren

Leave a Reply