Under the MSC legislation if a deemed tax debt of an MSC is not recoverable from the MSC or its directors office holders or associates the debt can be transferred to a Managed Service Company Provider (MSCP) its directors or any other party (and its directors) which ‘has encouraged or been actively involved in the provision by the MSC of the services of the individual’. This latter group could include the provider, and an agency where there is a referral arrangement with that provider.
In the ruling five PSCs were found to be MSCs and a consequent tax debt accrued as tax had not been paid as employment income, a requirement where the MSC legislation applies. In this case the payroll provider CBS (part of the i4 Group) which had set up the arrangements under a scheme known as GBS that managed payments and taxes for the PSCs, reported to be on the basis of legal advice provided by a firm of Solicitors, was found to be a MSCP. It is understood that HMRC is seeking a transfer of the tax debt to CBS. Whilst the decision may still be appealed what is most notable is that the judgment implies that a provider of this kind of scheme will be an MSCP because it is “involved” by reason of any fee arrangement that is capable of being linked to the PSC’s services.
“The tribunal ruled that the word “involvement”, used in the legislation, should be interpreted broadly” explained Ben Grover of the recruitment law specialist Lawspeed. He continued “The provider charged the PSCs in a variety of ways (a fixed percentage fee, a fixed amount as and when work was done and a fixed annual fee) and the decision was that all three modes of remuneration amounted to CBS benefitting financially on an ongoing basis. This meant that the criteria for MSC tax debt arose and the debt transfer provisions will then come into play if the debt is not paid. Whilst a decision of the First-tier Tax Tribunal will not work as a formal precedent, the judgment clearly indicates how tribunals will look at similar PSC arrangements.”
“The moral of the ruling is that agencies should undertake thorough due diligence when dealing with service providers that operate a PSC arrangement where payment to the contractors is not by way of employment income. Agencies should also be wary of claims that ‘legal advice has been obtained’ as proof of compliance.”
Ben Grover and the Lawspeed team will be discussing this ruling and its impact at its forthcoming seminar, “Taxing Times?” on Thursday 16th June at Garfield House, Marble Arch in London. The seminar aims to ‘un-confuse tax” and covers Agency Tax (Section 44-47 ITEPA), Construction Industry Scheme (CIS), Travel & Subsistence Expenses, Managed Service Companies (MSC), IR35, VAT and Other Limited Company Models, Public v Private Sector, Offshore Companies, Liability and Which Contracts to Use.
