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HMRC internal manual

Employment Status Manual

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HM Revenue & Customs
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Managed Service Companies (MSC): The Process

Time Limits

To be valid, a Transfer Notices must be issued:

  • To a person in the first category (that is, the director of the MSC, or other company officer or associate of the MSC): within twelve months of a debt becoming due in accordance with Regulation 97B/Regulation 29B
  • To a person in the second category (that is the MSC Provider, director or other office holder, or associate of the MSC Provider): within twelve months of a debt becoming due in accordance with Regulation 97B/Regulation 29BC
  • To a person in the third category (that is, a 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): within three months of an officer of HMRC certifying that it is impracticable to recover from persons in the first two categories.

The following steps should be followed:

Step 1: Regulation 80/Section 8

The SCU should, where necessary, issue a Determination under Regulation 80/Decision under section 8. If the Determination/Decision is appealed, whilst the appeal process proceeds, identify whether the MSC has the financial ability to pay the liability - see ESM3680 for areas to consider. Where it does not, identify the persons to whom the debt may be transferred and ascertain each person’s financial position and ability to pay the debt. Defend the appeal and once the sum becomes final and conclusive, move to Step 3.

Step 2: Establishing the Debt

The compliance team and/or DMB should identify the debt due from the MSC in accordance with Conditions A to E Regulation 97B/Regulation 29B.

Step 3: Seeking payment from the MSC

Issue a demand for payment to the MSC at its registered office, giving seven days to pay. (Such a demand should be issued even where the company is known to have no assets.)

Step 4: Action following issue of a demand for payment to the MSC

  • If the company fails to respond or responds advising that it cannot pay, consider its asset position based on information available to the Department (for example: accounts information, knowledge of systems and working practices etc.).
  • If the company has assets, Debt Management should seek to recover the money in the most appropriate way but should have regard to the time limits imposed for the transfer of debt. If action to recover the debt from the company takes, or is likely to take, more than three months (for example because insolvency proceedings are the only option), move to step 5.
  • If the company has no assets, move to Step 5. Note that it is not necessary for the company to be in liquidation or even to have ceased trading for transfer of debt to be considered.
  • If the company is in liquidation/Receivership/Administration, ascertain from the Liquidator/Receiver/Administrator the likelihood of full payment. Unless full payment can be guaranteed within three months, go to Step 5. Where a payment is subsequently received, see step 12 below.
  • If the company offers settlement by instalments, judge each case on its merits, including the likelihood of the company defaulting. Any such arrangement must have regard to the time limits for the issue of a Transfer Notice in Regulation 97D/Regulation 29D and must not exceed three months. If an arrangement is accepted, if the company defaults on any payment it is essential that you establish quickly the reason and consider moving to Step 5 having regard at all times to the time-limits for issuing Transfer Notices.

Step 5: Identification of potential transferees

Identify the names and addresses of the persons to whom the MSC’s debt may be transferred. Where the case did not emanate from a compliance team, refer to the SCU geographically nearest the MSC and ask them to undertake enquires regarding the names and addresses of persons in the first two categories.

Step 6: Ascertaining potential transferees’ ability to pay

Ascertain the financial position of the persons in the first two categories and their ability to pay the MSC debt. If the evidence is that the persons have the ability to pay the MSC’s debt go to Step 8. If the evidence is that the persons do not have the ability to pay the MSC’s debt, or their assets are alienated (e.g. offshore), or there is any doubt, go to Step 7. (See also paragraphs 3.4 and 3.5.)

Step 7: Potential transferees within the third category

The compliance team should identify the names and addresses of persons in the third category, liaising with PTCPP NICs Technical team regarding whether such persons fulfil the criteria of Section 688A(2)(c)/(d). The compliance team should also determine:

  • The period of time (in terms of the period to which the debt relates) that each person directly or indirectly encouraged or was actively involved in the provision by the MSC of the services of the individual; and
  • The degree and extent to which each person directly or indirectly encouraged or was actively involved in the provision by the MSC of the services of the individual; and
  • Each person’s financial position and ability to pay the MSC’s debt.

In terms of degree and extent, regard should be taken of the following, which is not intended to be an exhaustive list:

  • The period of time with which the person had some connection with the MSC
  • The extent of their role-whether it was peripheral or central
  • The extent to which their role was directly a contributing factor to the worker operating through a MSC
  • The extent to which they were instrumental in enabling the MSC to trade
  • The extent to which they had any influence, directly or indirectly, over the company’s failure to pay PAYE/NICs.

Step 8: Submission to Debt Transfer Team for consideration of issue of Transfer Notices

Submit the case to the Debt Transfer team for consideration of the transfer of debt. Include:

  • A declaration signed by an officer not below Higher Officer grade that they are of the opinion that the debt - the specified amount - is irrecoverable from the MSC in a reasonable period
  • Evidence in support of the above declaration - see flowchart ESM3680 
  • The names and addresses of the persons in the first two categories together with details of their financial position/ability to pay - see flowchart ESM3680 
  • A recommendation regarding which persons within the first two categories should be issued with Transfer Notices and the reasons why
  • Where research has indicated that it is likely to be impracticable to recover the specified amount from any person within the first two categories, evidence in support of this view
  • The names and addresses of the persons in the third category together with details of their financial position/ability to pay
  • Information regarding the period of time (in terms of the period to which the debt relates) that each person within the third category directly or indirectly encouraged or was actively involved in the provision by the MSC of the services of the individual; and
  • Information regarding the degree and extent to which each person in the third category directly or indirectly encouraged or was actively involved in the provision by the MSC of the services of the individual.

Step 9: Review of case by the Debt Transfer Team

The Debt Transfer team should review all of the papers and satisfy itself that on the evidence provided the debt is irrecoverable from the MSC within a reasonable period. If it is not satisfied, it should liaise with the referring office to resolve issues and record the resolution. Where the Debt Transfer team is satisfied that the debt is irrecoverable it should:

  1. Make a Direction under Regulation 97C(2)/Regulation 29C(2) authorising recovery of the specified amount from persons within section 688A(2), Part 11, ITEPA (see ESM3650, Appendix A).
  2. Consider to whom a Transfer Notice should be issued.

On the making of a Direction under Regulation 97C (2)/Regulation 29C(2), all persons within section 688A(2) become jointly and severally liable for the debt. However, this has no practical consequence for any person within section 688A(2) until such time as a Transfer Notice is issued. For example, there would be no obligation on a person to declare such a debt in their accounts until the Transfer Notice was issued.

Where there is ample evidence that the Director, other company officer or associate of the MSC have the financial ability to pay the specified amount, Transfer Notices should be issued initially only to persons within the first category. If Transfer Notices are only issued to persons in the first category, close liaison with Debt Management is essential to ensure that if the Specified Amount cannot be recovered, Transfer Notices are issued to persons within the second category within the time limits.

If there is any doubt as to the ability of persons within the first category to pay the Specified Amount, Transfer Notices should be issued to all persons within the first and second categories.

Where the referring office has indicated that none of the persons within the first two categories have the financial ability to pay, or their assets are alienated, or there is serious doubt as to HMRC’s ability to recover the specified amount from any of the persons, consider issuing a Transfer Notice to persons in the third category. Note that before a Transfer Notice can be issued to any person within the third category, HMRC must be satisfied, and an officer not below Higher Officer grade must certify, that it is impracticable to recover the specified amount from any person within the first two categories. (See ESM3625 and ESM3660, Appendix B.)

A Transfer Notice must be issued to a person within the third category within three months of HMRC certifying that it is impracticable to recover the specified amount from persons in the first two categories. If you decide to issue a Transfer Notice to persons in the third category, Notices must be issued to all persons in this category identified by the referring office.

There is no statutory “upper” time limit on when a Transfer Notice may be issued to a person within the third category. Theoretically, no matter how long it takes for HMRC to conclude that it is impracticable to recover a debt from a person in the first or second categories, HMRC still has three months from certifying such a fact, to issue a Transfer Notice. However, in practice a Transfer Notice should not be issued to a person in the third category more than six years after the dates set out in Regulation 97D/29D.

Step 10: Issue of Transfer Notices

The SCU team will issue a Transfer Notice/Transfer Notices to the persons identified, and will provide an update to DMB of the Notices issued.

Note that the format of the Transfer Notice is prescribed in Regulations and must therefore conform with the statutory requirement precisely. A stencil for this purpose is at ESM3665, Appendix C.

In all cases a Transfer Notice must set out the total PAYE and Class 1 NICs unpaid by the MSC, split between PAYE and NICs and the months and years to which it relates in addition to the Specified Amount (i.e. the total sum irrecoverable from the MSC).

A Transfer Notice to a person in the first and second categories will always require payment of the full Specified Amount.

A Transfer Notice to a person in the third category must:

  • State that it is impracticable to recover the Specified Amount from named persons, being persons within section 688A(2)(a) and (b)/(d), Part 11, ITEPA, and that an officer of HMRC so certified on x date; and
  • Have regard to the period for which the person directly or indirectly encouraged or was actively involved in the provision by the MSC of the services of the individual (this information will have been provided by the referring office.)

It is possible therefore that a Transfer Notice will specify a “Lower Amount” that HMRC are prepared to accept. Where this is the case you should explain in a covering letter how the Lower Amount specified in the Transfer Notice has been calculated (for example, the Specified Amount may relate to months one to two of tax year 2008 to 2009 but the person was only actively involved with the MSC for months one to three of tax year 2008 to 2009. The Lower Amount would be the actual amount due in respect of the first three months or where this detailed information is not available, 25 per cent of the Specified Amount.)

Step 11: Receipt of Appeal(s)

SCU Team:

Any appeal will in the first instance be sent to the SCU team. The SCU should acknowledge the appeal, notify Debt Management which person has/persons have appealed, and where appropriate refer the appeal(s) to PTCPP NICs Technical team together with all relevant papers. Where the SCU is advised by DMB that a payment (from any person) has been received in respect of a Specified Amount subject to appeal, notify PTCPP NICs Technical team immediately, providing full details.

DMB:

Where the Debt Transfer team notifies you that an appeal has been received in respect of a named person(s), the debt should not be pursued in respect of that person/those persons only. If payment (partial or full) is received from any other person served with a Transfer Notice, you should advise the Debt Transfer team immediately.

Step 12: Receipt of payment(s)

DMB:

Where, exceptionally, a payment is received from a person not within section 688A(2) ITEPA and not issued with a Transfer Notice, for example a liquidator:

  • If the payment satisfies the debt in full, you should notify the Debt Transfer team who will arrange for the Transfer Notices to be withdrawn
  • If the payment only partially satisfies the debt, you should write to all transferees advising that a lower amount is now due.

Where payment is received from a person issued with a Transfer Notice:

  • If the payment is the full amount of the Specified Amount, you should write to the payee and all transferees requesting payment of the interest (explaining to other transferees that the Specified Amount has been paid)
  • If the payment is the Lower Amount notified to a particular transferee, you should write to the other transferees advising the balance still outstanding
  • If the payment is a less than the Specified Amount and the payee advises that this is all that they can afford, you should liaise with the SCU team to decide whether to accept the lower sum as final settlement of that particular transferee’s liability in accordance with Regulation 97C(5)/Regulation 29C(5). Where a lower amount is accepted you should write to the other transferees advising the balance still outstanding. See also 5.25 where the full amount cannot be recovered from persons in the first and second categories.

Step 13: Total amount cannot be recovered

Immediately it becomes apparent that it will not be possible to secure full payment from persons within the first category (where only Transfer Notices have been issued to persons in this category), DMB should make a full report to the Debt Transfer team in order that the Debt Transfer team can consider issuing Transfer Notices to persons in the second category within the specified time-limit.

As soon as it becomes apparent that it will not be possible to secure full payment from persons within the first and second categories, DMB should make a full report to the Debt Transfer team in order that the Debt Transfer team can consider issuing Transfer Notices to persons in the third category on the basis that it has been impracticable to recover the Specified Amount (or a part thereof) from persons in the first and second categories.

Step 14: repayment of excess amounts

Repayment of excess amounts should be made timeously, without delay.

Where payments exceed the total amount due (the Specified amount plus interest) repayment of any excess, where there is more than one payee, should be on a just and equitable basis. In practice this means:

  • Where payments have been made by persons in all three categories, any excess should be repaid to persons in the third category first, pro-rata to their payment.

Example

The Specified Amount plus interest is £50,000. Payments are received: £10,000 from the MSC‘s Director, £30,000 from the MSC Provider, and £10,000 each from two persons in the third category. Repayment would be £5,000 each to the persons in the third category.

  • Where payments have been made by persons in both the first and second category repayment should normally be to persons in the second category first (pro-rata to their payments) but you should discuss with the compliance team whether, given the circumstances, it is just and equitable to repay persons in the second category to the detriment of persons in the first category.

Example

The Specified Amount plus interest is £50,000. Payments are received: £20,000 from the MSC‘s Director, £50,000 from the MSC Provider. Normally, repayment would be £20,000 to the MSC Provider. However, consideration should be given to such factors as the extent to which the worker was encouraged by the MSC Provider and the financial impact of the debt on both parties.

  • Where payments have been made by persons in any single category, repayment should be pro-rata to their payments.

Example

The Specified Amount plus interest is £50,000. Payments are received: £30,000 from the MSC Provider and £30,000, each from two associates of the MSC Provider. Repayment would be £13,333 to each person.

Step 15: Withdrawal of Transfer Notices

The Debt Transfer team should write to a transferee/transferees withdrawing the Transfer Notice where:

  • An appeal is upheld

The Transfer Notice that’s withdrawn should only be in respect of the appellant(s) unless the grounds for the appeal were under Regulation 97G(3)(a)/Regulation 29G(3)(a) or Regulation 97G(3)(b)/Regulation 29G(3)(b) in which case all transferees will need to be notified accordingly.

  • DMB advise that the debt, including all associated interest, has been satisfied in full (and by whom).

Withdrawal of a Transfer Notice is only appropriate where it is no longer intended to seek any part of the debt (including interest) from a transferee. Transfer Notices should not be withdrawn from any person who has partially satisfied a debt (including interest), rather they should be advised by letter whether their partial payment represents the total sum due.