Managed Service Company legislation: unpaid PAYE and Class 1 NI contributions avoidance schemes (Spotlight 32)

Published 29 July 2016

HM Revenue and Customs (HMRC) has won a case in the First-tier Tax Tribunal involving attempts to avoid PAYE income and Class 1 National Insurance Contributions (NICs) on employment income. In Christianuyi Ltd & Ors v Revenue and Customs UKFTT 272 (TC) (21 April 2016) HMRC successfully argued that the managed service companies (MSC) legislation (Chapter 9 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 and equivalent National Insurance contributions legislation) applied to arrangements established and run by a third party (Costelloe Business Services Limited).

Where a company is set up to provide a worker’s services to an engager and the MSC legislation applies, amounts paid to an MSC for those services that are not already subject to PAYE income tax and Class 1 NICs (for example, share dividends), are treated as employment income.

HMRC’s firm view, now supported by the tribunal decision, has always been that these types of arrangements do not work.

HMRC continues to open enquiries into users of similar arrangements that include the provision of workers in many different industry sectors, including road haulage, health, care and education.

HMRC will investigate and challenge these arrangements via every route open to it, including litigation, and seek full settlement of the tax due, plus interest and penalties, where appropriate.

The First-tier Tribunal (FTT) recently granted the appellants leave to appeal.

We expect those using these or similar arrangements to pay the PAYE income tax and NICs they owe following this emphatic win for HMRC.

If any part of the tax and NICs are irrecoverable, HMRC will transfer unpaid debts to others, including the service company’s directors, the MSC provider and the MSC provider’s directors and associates. All are jointly and severally liable for the debts.

Promoters should carefully consider the Disclosure of Tax Avoidance Scheme (DOTAS) rules to determine if the arrangements they are marketing should be declared to HMRC.

HMRC’s DOTAS taskforce will closely examine whether DOTAS should apply to individual cases.

This win is yet another reason for people to get out of avoidance and stay out, proving tax avoidance doesn’t pay.

HMRC is relentless in closing down avoidance schemes and encourages users of similar products operated to settle their outstanding tax or NICs enquiries now.

If you’re ever tempted to enter an avoidance scheme, remember that you can end up significantly worse off.

HMRC has published Tempted by tax avoidance to guide taxpayers through the misleading statements promoters may make.

If the scheme looks too good to be true, it almost certainly is.

FTT decision: Christianuyi Ltd & Ors v Revenue and Customs UKFTT 272 (TC) (21 April 2016)