6th January 2008 – Transfer of Third Party Debt

The latest part of the government’s Managed Service Company (MSC) legislation comes into force on 6th January. Whilst many agencies have been diligently preparing for this date for several months, in the run up to the festive season there is a danger that its significance may have been pushed into the shade somewhat and a sense that some agencies have been adopting an ostrich approach.

Any PAYE and NIC debt incurred after 06/01/08 by a contractor working through an MSC, can be passed on to “any person who directly or indirectly has encouraged, facilitated or otherwise been involved in the provision by the MSC of the services of the individual”. This could of course potentially include both recruitment agencies and their clients. After much debate, HMRC is now stalling on the idea of creating an audit scheme which would allow certain third parties to assess whether a provider was compliant with the MSC legislation. This places the emphasis on agencies to carry out their own audit and to ensure that their consultants are properly trained in
order to protect themselves and their clients.

Mitigating Risk

• Umbrella companies, in which all payments to employees are treated as employment income which is paid in the form of salary and allowable expenses, are outside the scope of the legislation. That said there is a school of thought that says that umbrella providers who allow or even encourage their contractors to over-claim expenses, may pose a risk as their employees could profit from their claims by paying too little tax. It is worth investigating umbrella providers’ expense policies. Do they re-iterate the need for contractors to only claim for legitimate expenses and to keep receipts or do they promote “special expense dispensations” of set amounts which their contractors can claim without receipts?
  
  
• It is important to stress that for there to be any potential debt to transfer, an MSC Provider must be present and they must be “involved” with the company. In the event that a contractor’s income is not treated entirely as employment income (for example if they are being paid dividends through their own limited company), a number of checks should be applied. Firstly have they been advised by professional accountants? HMRC guidance notes state that “a firm of accountants carrying on business as accountants” are not caught by the legislation as they fall outside the definition of an MSC Provider.
  Secondly, if an MSC Provider is present, are they “involved” with the company? Questions to ask would include, does the provider have access to the company bank account? Does the provider take a fee on an ongoing basis that is linked to the services provided by the company e.g. a fee linked to company turnover? Does the provider influence and control the way in which company profits are distributed? If
  the answer to any of these questions is yes, the provider is likely to be “involved”. Some agencies have asked providers to justify why they believe themselves to be outside of the legislation which is a good open ended way to ask them to outline their business model.
  
  
• Beware of contractors using offshore companies. Debt from an offshore MSC maybe difficult to recover and more likely to be passed on to third parties.
  

There are good arguments for agencies giving their contractors preferred supplier lists of providers that they believe to be compliant. Indeed many are already doing so. However if a provider subsequently falls foul of an HMRC investigation, their presence on a PSL could cause problems for an agency as it may be argued that
they have facilitated the use of the MSC. However burying your head in the sand is not an option. Agencies should at the very least be able to produce a paper trail that documents the precautions they have taken in the event that HMRC come knocking. The biggest problem facing the industry at this stage is that in the absence of a test case, nobody – including HMRC – can be certain how the legislation will be interpreted by the courts.
The most important thing now of course, is to make sure you are not part of the test case.

For further information, please contact Tony Walkley - 020 7759 5511 / tony.walkley@1stcontact.com