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This publication is available at https://www.gov.uk/government/publications/spotlight-32-managed-service-company-legislation-tax-avoidance-scheme-involving-unpaid-paye-and-class-1-national-insurance-contributions/spotlight-32-managed-service-company-legislation-tax-avoidance-scheme-involving-unpaid-paye-and-class-1-national-insurance-contributions
1. First-tier Tribunal and Upper Tribunal decisions
HM Revenue and Customs (HMRC) has won a case in the First-tier Tribunal (FTT) involving attempts to avoid PAYE Income Tax and Class 1 National Insurance Contributions (NICs) on employment income.
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.
Following an appeal, the Upper Tribunal (UT) agreed with the original FTT decision that the appellant’s companies were operating as MSCs.
In addition to the original decision, the UT considered 2 additional areas.
Firstly, the definition of a MSC provider as ‘a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals’. This decision confirms HMRC’s view that if the answer to both of the following questions is yes, a person is a MSC provider:
- does the person promote or facilitate the use of a company?
- does that company provide the services of individual?
Secondly, the UT decided that ‘influences’ or ‘control’ has a wider meaning than that expressed in the FTT decision. In this case, Costelloe Business Services Limited influenced how payments were made to workers through the use of a standard product, by causing the workers to receive wages and dividends instead of just wages.
When workers buy into such products, allowing the MSC provider to determine the amount to be paid as a dividend and to carry out the administrative steps to affect this, it amounts to ‘control’.
2. Effect of the MSC legislation
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, healthcare and education.
HMRC will investigate and challenge these arrangements through every route open to it (including litigation) and seek full settlement of the tax due, plus interest and penalties where appropriate.
The FTT recently granted the appellant’s leave to appeal.
We expect those using these or similar arrangements to pay the 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.
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. If the scheme looks too good to be true, it almost certainly is.