With the change in the tax year and tax laws are amended and reviewed, comes the opportunity for the managing director of the Employment Business/Agency (“Agency”) to review the way that their Agency contracts with ‘accountants’ and ‘payroll companies’. In light of the upheaval in the public sector, what is HMRC planning in the way of the private sector in 2018?
Given that resources are thinly spread at HMRC an obvious target would be a renewed attack on work-seekers using the ten years old piece of under-used, Managed Service Companies or (MSC) Legislation, which was beefed up in 2014 with a TAAR (Targeted Anti-Avoidance Rule) aimed at NIC avoidance.
In short, and to refresh your memory, a Managed Service Company (MSC) is a company structure that is managed and controlled by a third party that administers and influences payments to a “work seeker”. It developed from attempts to avoid IR35, with external “advisors” controlling a freelancer’s personal service company, and therefore the work-seeker is not necessarily truly self-employed so HMRC rightly perceive that insufficient tax is being paid.
As a result, MSC legislation requires all income through this structure to be taxed as employment income, subject to PAYE and NI in full rather than the option to pay in dividends. Any business that manages or promotes the use of an MSC is classed as an MSC provider, and therefore the work seeker is taxed accordingly.
If an MSC does not pay its taxes in full, HMRC can demand the unpaid tax from other parties, including transferring the debt personally to the other directors of the MSC, the intermediaries who formed the MSC, or those deemed to have encouraged the work-seeker to use the MSC route (potentially an unwitting Agency”). The underpaid tax can be demanded from these parties either individually or together.
Introducing a Targeted Anti-Avoidance Rule for intermediaries
David Gauke, Secretary to the Treasury speaking on 1st May 2014 introduced a further targeted anti avoidance rule.
The “Clause 5” introduces a new TAAR into the Social Security (Categorisation of Earners) Regulations 1978 (SI 1978/1689) to ensure that workers who would be employees as a result of these regulations but for the imposition of ‘artificially constructed intermediary arrangements’, are treated as employees for NICs purposes.
The TAAR is modelled on Section 46A of the Income Tax (Earnings & Pensions) Act (ITEPA) 2003 (introduced by Section 16, Finance Act 2014) which is the parallel TAAR applying for income tax purposes in relation to agency workers.
The TAAR in Clause 5 is however more broadly based in that it extends beyond purely agency workers. It also applies to (i) employees employed by a foreign employer who are supplied to a host employer in Great Britain and (ii) cases where an individual work seeker provides their services further to a contract between an end client and a UK agency.
In any event, we agree that the better approach is to broaden the primary NIC legislation to make specific provision for regulations to address situations where a TAAR may be appropriate in determining the status of earners, and who should be the secondary contributor for NIC purposes. This is what Clause 5 does, in a typically convoluted way.
The TAAR’s approach
The approach in Clause 5 is to focus on ‘the main purpose, or one of the main purposes’ of the arrangements that have been implemented in testing whether or not the TAAR should bite. The Government therefore introduced a TAAR in the legislation to deter such avoidance. It is designed to enable HMRC to consider both:
- the motive for setting up the arrangements in the first place
- whether it is set up with the motive of avoiding income tax and NIC; and
- what it achieves – whether it results in less income tax and NIC being paid.
The Chartered Instistute of Taxation commented: “HMRC would be able to use the TAAR in the most egregious cases where, for instance, an agency requires all of their workers to set up a PSC to avoid the new legislation and thus paying NIC.”
Personal Service Companies (PSCs)
This is a particular area which we think may require some further consideration and that is where work-seekers work for their own personal service company (PSC).
HMRC have said that generally speaking the recently enacted specific income tax and NIC legislation relating to work-seekers (in particular agency workers) is not intended to apply to PSCs. However, it strikes us that the potential difficulty here is that PSCs are typically established for a variety of reasons and that things are not generally so black and white. For example, an individual may decide to establish a PSC both because of the attractions of limited liability and because they may be able to reduce their tax and NICs bill at the same time, or prefer the work life balance of being self-employed in a structure that is relatively easy to operate and undestand.
For example, HMRC say that ‘in most cases the agency legislation has never applied, and will continue not to apply, to PSCs because the agency legislation does not apply where…the remuneration is not in consequence of the worker providing their services under the contract…[and] it will not apply in most cases where profits are withdrawn as dividends as this is a return on capital distribution, not remuneration in consequence of the worker providing their services’.
HMRC has also said that in so far as the TAAR is concerned then ‘people who set up PSCs for a reason other than reducing tax – such as the limited liability protections incorporation provides – would not be within the TAAR. HMRC will continue to monitor activity in these areas’.
We think it would be helpful if HMRC could set out its position on whether it is intended the TAAR should or should not apply to the PSC in these circumstances. HMRC recognises that Agencies may be concerned that their core business of placing ‘work seekers’ with end clients may bring them within the scope of the MSC and TAAR legislation.
Managed Service Companies
In its guidance notes it makes the following comments on MSC’s
“Neither Chapter 9 ITEPA, nor section 688A ITEPA, actually applies to Agencies carrying on their core business. There are specific exclusions in both sets of legislation for such businesses. Nor will the legislation be applied to Agencies which undertake services which are merely ancillary to the core business.
However, be aware of the following as if an Agency is:
- Demonstrably carrying on a business of providing structures (companies or partnerships) through which workers provide their services, and provides services to those structures to the extent that they would be considered to be “involved” as described in section 61B(2), then that Agency would be an MSC Provider; or
- Demonstrably acting in concert with a person who is an MSC Provider for the purposes of securing that an individual’s services are provided by a company, then that Agency would be an associate of an MSC (but see preferred supplier list question below); or
- Demonstrably encouraging an individual to operate through an MSC and/or beyond the mere placing of the worker’s company with end clients and functions directly linked to such placing, or is otherwise actively involved in the MSC’s provision of the worker’s services, then that Agency would potentially render itself liable for the transfer of any PAYE/NICs debt of the MSC.”
The Think Accounting and New Wave case altered the MSC landscape, as therefore as a responsible, MD of an Agency , you should ask yourself the following three questions.
Question 1. So does the above legislation (MSC and TAAR) preclude the Employment Agencies and Businesses operating preferred supplier lists?
Question 2. What are the indicators a service provider may be an MSC provider?
Question 3. What can I realsitically tell a work seeker – where the Work seeker already operates through an existing PSC company or is intending to use that structure?
Question 1. PSL’s good idea or not
- So does the above legislation preclude the Employment Agencies and Businesses operating preferred supplier lists? Answer The referral of work seekers to preferred suppliers does potentially increase an Agency’s risk in terms of transfer of debt.
- However, HMRC does not wish to discourage the use of “preferred supplier lists” as it recognises that these have a legitimate cost saving function.
Where HMRC may become interested, however, is in the forced use of a particular service provider or a particular structure – be it PSC, umbrella or Sole Trader on a work-seeker. i.e. it is a limited company through X Limited or we can’t give you work”………. Let’s hope then that the preferred Supplier is not found to be a MSC provider then………..
The guidance notes goes on to say, “In determining whether referral by an Agency of a work seeker to a preferred supplier might constitute encouragement, HMRC will consider all of the facts relating to that referral to establish whether the underlying motive was that of encouraging the work seeker into an MSC. For example, HMRC would consider whether the Employment Agency had taken reasonable steps to satisfy itself regarding the status of the provider (subject to the fact that limited information is available to an Agency.)”
To help Agencies decide whether a preferred supplier may be an MSC Provider, HMRC has produced “Indicators of whether a service provider may be an MSC provider”.
Question 2. ‘MSC provider’ or ‘Accountant’?
The following questions, again detailed in the MSC guidance notes, though the answers may not be necessarily, transparent with your dealings with the Service Provider, are for the Agencies to consider but include the following:
- Does the service provider interpose themselves between the individual/company and the recruitment Business in any other way whatsoever i.e. provide a legal service to act on behalf of the work seeker in times of dispute?
- Does the service provider only support service company clients?
- Is the individual work seeker unable to change service provider and retain their company i.e. does the service provider have a large release fee for information or a de-archiving fee for newly appointed advisors?
- Do all of the companies the service provider supports have a unique identifier? (e.g. John Smith 125 Ltd, Pete Brown 125 Ltd.)
If the answer to any of the above questions is “yes”, the service provider may be an MSC provider and therefore one to avoid using.
Question 3. What can I ask/tell a work seeker – where the Work seeker already operates through a PSC company or is intending to use that structure?”
The MSC guidance notes are pretty explicit in how you should deal with your work seekers or Agency workers.
- Does the Agency need to establish whether the Agency worker’s company is an MSC or PSC? Answer: No. If the work seeker approaches an Agency and already operates through a company, then there is no need to ask any questions as to the nature of the company. (The mere engagement of an MSC would not in itself render you potentially liable to the MSC’s debts.)
- If I know, or I am told by the worker, that their company is an MSC, can I still arrange work for the work seeker? Answer: Yes. Provided that you are merely contracting with an existing company and not one through which you have encouraged the work seeker to operate.
- Can I explain to a work seeker that different pay rates apply depending on whether they work through a limited company, direct through the Employment Business etc? Answer. An Agency can provide factual information only without commenting on the merits or otherwise of a particular payment model. It should point out that each payment model has different tax, National Insurance and contributory benefit implications. If the work seeker needs more information, they should seek independent advice.
- Can I explain to a work seeker that a particular end client will only engage work seekers operating through limited companies? Answer: An Agency can provide factual information only. If certain clients will only engage workers operating through companies, provided that those end clients are relevant to the work the work seeker is seeking, then such a statement would be the provision of factual information.
- Can I advise a work seeker that a particular type of engagement model would make them more “saleable” in the market place? Answer: This is not advisable, as it may well stray beyond the provision of factual information. It is acceptable to set out the various engagement models and the different pay rates relating to them. But an Agency should point out that each payment model has different tax, National Insurance and contributory benefit implications. If the work seeker needs more information, they should seek independent advice.
- If a work seeker asks what the best engagement model is, can I tell them? Answer: No
- If a work seeker asks how they arrange to work through a limited company, what can I tell them? Answer: An Agency can refer them to a preferred supplier or preferred supplier list but this by its nature carries some risk if the preferred supplier is an MSC provider. See list of high level indicators as a way of mitigating this risk in question two above.”
As it is ten years since the MSC legislation was introduced, how does your business fare in answering the three main questions above?
It might pay to sit up and take note because in our opinion, HMRC is a wounded animal, following the Chancellor’s recent dramatic U-Turn on NIC for the self-employed. Additionally, since HMRC does have powerful transfer of debt provisions for those caught using Managed Service Companies, who are found to be involved in their clients’ business affairs, a hefty tax bill might ruin your bonus chances in 2018.
In summary, you should be careful of which “accountants” you use on your PSL’s, checking regularly that they are not MSC’s providers involved in the provision of artificially contrived schemes for company administration, when both the Agency and the work-seekers thought they were using a safe PSC, instead they were intrinsically linked to a MSC provider. Finally, you should perform a satisfactory level of due diligence and understand the compliance of the structures your work-seeker uses.