Managed Service Companies (MSC): Transferring the Debt
The Categories of Transferee
Section 688A (2), Part 11, ITEPA sets out four categories of persons to whom a debt can be transferred. The fourth category links to the second and third categories so for all practical purposes there are three categories. In this context a “person” means an individual, company, or partnership. The three categories are:
- The director, or other office holder or associate of the MSC
- The MSC Provider or the director, or office holder or associate of the MSC Provider
- Any other person who directly or indirectly has encouraged or been actively involved in the provision by the MSC of the services of the individual, or a director, or other office holder or associate of such a person.
Only debts incurred after 6 January 2008 can be transferred to persons within the third category. This is set out in the Regulations.
The Regulations refer to a person in the second category as a person within section 688A(2) b or paragraph (b) associate. Similarly they refer to a person in the third category as a person within section 688A(2) (c) or paragraph (c) associate (see below for the definition of ‘associate’ in this context).
The legislation requires that before a debt can be transferred to a person within the third category above, it must be impracticable to recover the debt from a person within the first two categories. When a debt is “impracticable” to recover is explained at ESM3635 steps 6;9;13. This will be established either by virtue of enquiries undertaken by compliance teams, or following unsuccessful debt recovery action by Debt Management.
The legislation does not define “impracticable”. Simply because a debt may be difficult to recover, for example because a person’s assets are in the form of property, does not make a debt impracticable to recover. But if, for example, a person’s assets are located outside UK jurisdiction, or the person has no funds/assets or ability to pay, then such a debt would normally be impracticable to recover from such a person.
In considering whether it is impracticable to recover the debt from persons within the first two categories, the Regulations provide that HMRC may have regard to all of the MSCs with which a person in the first two categories is connected. One of the practical consequences of this is that in determining a MSC Provider’s financial ability to pay the debt of a particular MSC, HMRC may have regard to the potential debts of other MSCs to which the Provider will become liable, even if those debts have yet to be formalised and transferred.
In determining to which persons within the first and second categories to transfer a debt, regard must be taken of the statutory time-limits (see 5.1 below). If HMRC fail to have regard to statutory time limits and as a consequence are unable to issue a Transfer Notice to any person within the first or second category who it can reasonably be assumed would have satisfied the debt, HMRC cannot then seek to transfer the debt to a person within the third category citing impracticality in terms of those persons time-barred.
Whether a person falls within the third category should be considered initially only by a compliance team. Compliance teams should seek advice from PTCPP NICs Technical team regarding interpretation of a person falling within the third category. Normally a worker/shareholder in a MSC will automatically be considered to be within the third category. However, where there is evidence that the worker was genuinely unaware that they had been made a shareholder and were working through a MSC, this presumption does not apply and each case should be considered on the facts.
Determining whether a person falls within the third category should in the first instance be the responsibility of the compliance team/Special Compliance Unit, but the final decision on whether it is appropriate to issue a Transfer Notice to a person within the third category rests with the Debt Transfer team. If the Debt Transfer team has any doubt as to the appropriateness of issuing a Transfer Notice, they should contact PTCPP NICs Technical team.
In terms of persons within the third category, it is not the intention that persons who have unwittingly been involved with MSCs or have merely received a worker’s services, are issued with Transfer Notices. Issue of Transfer Notices should only be considered to this category of person where there is clear evidence that the person:
- Encouraged an individual into a MSC (in this context encouraged has a wide meaning and includes requiring the worker to operate through a MSC as a prerequisite to being offered a job, through to offering financial inducements to operate through a MSC); and/or
- Played an active part in the MSC’s provision of the services of the worker such as advertising the services of the worker to prospective clients, or providing transport to enable the worker to undertake work; and
- Knew that the company was a MSC or failed to take reasonable steps to determine the status of the company.
The legislation includes specific exclusions from section 688A(2)(c)/(d) for:
- An Employment Business/Agency carrying on its core business of placing work seekers operating through service companies with end clients; and
- The mere provision of legal or accountancy advice in a professional capacity. In practice this should be taken to mean any person providing professional accountancy/tax/legal advice in a capacity that would not result in them being classed as a MSC Provider. (For more information, see the guidance on Chapter 9 ITEPA.)
The following list includes some other situations which do not fall within section 688A(2)(c)/(d). This list is not exhaustive and if there is any doubt as to whether a person falls within the third category you should refer to PTCPP NICs Technical team for advice:
- An end user client in receipt of the services of a worker operating through a service company set up by the worker, wholly independently of any influence/encouragement by the end user client.
- An ordinary employee of the MSC provider who is not a shareholder of the company and does not have a role in managing the business. For example, someone in a clerical, secretarial or IT support role would not be considered to be within the provision.
- A business or individual providing general services to the MSC which are provided to a range of clients, for example company formation or payroll services.
Meaning of Associate
The definition of “associate” is that in section 61I, Chapter 9 ITEPA. Broadly, in terms of a company, a person connected with the company. For the purposes of transfer of debt, “associate” does not extend to an associate of an individual. You cannot transfer a debt to, for example, the spouse of the Director.
An associate does not include an investor who as part of a wider investment portfolio, invests in a person within categories two or three.