Tackling Managed Service Companies

Transcription

1 Tackling Managed Service Companies Response by The Chartered Institute of Taxation to the consultation document Tackling Managed Service Companies and the further draft legislation published in the document Managed Service Companies Transfer of Pay as You Earn and national insurance contributions debts 1. Introduction 1.1 The Chartered Institute of Taxation (CIOT) welcomes the opportunity to comment on the Government s proposed measures and draft legislation in relation to managed service companies (MSCs). 1.2 We have combined our comments on the two consultation documents, Tackling Managed Service Companies and Managed Service Companies Transfer of Pay as You Earn and national insurance contributions debts, into this one response. 1.3 We should be happy to discuss any part of our comments in further detail. 2. The current position 2.1 We acknowledge that some MSCs are responsible for significant underpayments of Pay as You Earn (PAYE) and National Insurance Contributions (NICs), as a result of the failure to apply the Intermediaries legislation (IR35) properly; we further acknowledge that this is a serious issue that HM Revenue & Customs (HMRC) cannot ignore. 2.2 We also understand that the enforcement of the proper application of IR35 by HMRC is difficult, due to the vast number of contracts involved and the requirement to test each contract individually; collection of debts which are found to be due is also very difficult, and sometimes impossible, because of the lack of assets within each service company and the problems under current law of transferring the debts to either the worker or the provider of the arrangements.

2 2.3 However, we consider that the strong growth in MSCs and the apparent disregard, among some MSCs, for IR35 arises partly from a failure adequately to resource the enforcement of IR35 when it was first introduced. Had more resources been deployed to enforce the rules at the outset, these further legislative changes might not have been required. 3. The underlying issues 3.1 We know that both HMRC and HM Treasury (HMT) are aware that behind the continued growth in MSCs lie inherent differences in the amounts of tax paid by the employed, the self-employed and those working through a company outside of IR35. While these differences survive, the temptation to arbitrage them for all parties (engager, worker and intermediate agencies) will be very high. 3.2 Employers bear extremely heavy NIC costs and burdensome employment law risks, and employees also bear high NICs and few allowable expenses. For many low income workers, moving from one job to another, employment rights are worthless. Commercially, what is important to these workers is the amount of cash they take home. They are willing to give up employment rights for a little extra cash and can, therefore, easily be persuaded that working through a MSC is best for them. 4. Alternative approaches 4.1 It would have been possible for the Government to see the MSC issue as merely a symptom of this underlying arbitrage opportunity, and to abandon the current policy approach taken by the Government, which we understand to be as follows: Those who are self-employed, or who would be self-employed if they worked directly for the engager, should have a lower rate of tax and NICs than if they were employed; and If an intermediate service company or agency supplies the worker, it is these bodies which have the primary responsibility for the tax and NICs, not the end-users. 4.2 More radical solutions than those set out in this document could, for instance, have included: The imposition of NICs on dividends for small businesses, at least up to a certain level; or Following the outcome of the Muscat case (Muscat v Cable and Wireless (UKEAT/0661/04/LA)), the imposition of employee levels of tax and NICs on the engagers (ie ignoring the service companies). 4.3 We understand that the Government is fully aware of the underlying tension here, and of the possibility of deploying one or more of these radical options. In our view, the approach set out in this MSC consultation is the more proportionate and balanced one, seeking to deal, as it does, with the immediate issue rather than introducing a more fundamental change that would affect a much greater number of workers and engagers. 4.4 Equally, we understand why the alternatives, either leaving the current situation P/bc/subsfinal/pers

3 as it is or using existing enforcement powers, are not (or are no longer) acceptable. 5. After the new rules 5.1 We have set out above our view that, had there been more, and more targeted, attempts to deal with non-compliant MSC providers at an early stage, this legislation might not have been necessary. 5.2 We have similar concerns with this legislation. Providers who currently operate MSCs may seek to avoid or evade its operation, for instance by devising variations of Personal Service Companies (PSCs) which may or may not be tax compliant. Unless adequate resources are deployed to enforce the legislation, we consider that there will continue to be significant risks to the Exchequer. 6. The questions for consultation 6.1 Definitions of MSCs 6.2 Question 1: Whether there are other defining characteristics of MSCs that should be reflected in the legislation We agree that the main characteristics that most MSCs have in common are: 1. The Managed Service Company Provider (MSCP) sets up the companies and allocates workers to them; 2. The MSCP providers the company director and secretary; 3. The MSCP provides a high degree of financial and management control over the MSC, in particular the MSC s bank account; and 4. The MSCP makes the decisions on how income is converted into take home pay We have not been able to identify any other characteristics that should be reflected in the legislation. 6.3 Question 2: The Government would welcome views on the clarity of the legislation Our main concern is distinguishing between MSCs and PSCs, particularly where the PSC outsource various operations to another party. The legislation is dependent on there being a clear and unambiguous definition of exercises control over the finances and general management of the companies (Section 61B(2)(c)) There are workers that operate through a PSC without failing IR35 but who do not have the time to manage a company and will therefore outsource functions to professionals (eg company secretarial functions). It is therefore important that the legislation clearly distinguishes between these PSCs and MSCs We consider that the distinction depends on the control retained by the worker. The consultation document proposes that control takes its general meaning, which is: P/bc/subsfinal/pers

4 1. to command, direct, or rule; 2. to check, limit or restrain; and 3. to regulate or examine As can be seen, control has a wide meaning, and there is not a clear and unambiguous definition of what the word means in practice. The key management actions that underlie control over the finances and general management of the companies are, we believe: 1. Acceptance of contracts to supply the services of an employee of the MSC; 2. Awarding contracts to suppliers of goods and services (if any); 3. Reaching conclusions on the IR35 status of each contract; 4. Deciding how to reward employees and shareholders ie the split between salary and dividends; 5. Decisions on banking receipts and paying expenses and liabilities; and 6. Drawing and signing cheques We consider that the last two actions are the key distinguishing control issue. That is, who has day-to-day control of the company bank account (or the account into which the company s funds are banked). However, even here it is possible (although in practice we believe very uncommon) to delegate operation of the business bank account to an agent without abrogating control over the account For the legislation to be clear, the meaning of control should be defined so as to distinguish between PSCs with outsourced functions and MSCs. Unless the legislation defines what is meant by control, taxpayers will not have the clarity and certainty required to self-assess their liabilities. It is not sufficient to define control by guidance if that guidance cannot then be relied on in Court. Hence, it is important that the legislation is sufficiently clear as to what it does and does not apply to The consultation document indicates that the MSC legislation is not intended to catch umbrella companies where the worker only gets a salary and reimbursed expenses but has no shareholding or entitlement to a dividend in the umbrella company. However, there has been much uncertainty over this issue, as is evident from the discussions on various online fora, etc, and, in our view, the legislation is ambiguous. We should therefore like to see the legislation clarified to confirm that umbrella companies are not caught Within section 61B the meaning of an MSC depends on there being an MSC scheme where the person who makes the scheme or arrangement available exercises control over the finances or general management of the companies. Is the reference to the plural companies intended? It implies that, if the person who makes the scheme available controls only one company, there is not an MSC scheme or an MSC. 6.4 Question 3: The Government would therefore welcome views on whether the legislation could be strengthened further and, if so, how? To strengthen the legislation, there needs to be total clarity as to what will or will not be within the definition of an MSC. Any uncertainty could render the legislation unworkable or difficult to enforce. As indicated above, we consider the key to this clarity is clearly defining what is meant by control. P/bc/subsfinal/pers

5 6.5 Question 4: The Government would welcome comments on the draft legislation on the tax charging provisions, including the treatment of expenses Under IR35, where Muscat applies, IR35 ceases to be applicable and the liability for tax and NICs rests with the end client. However, it is not clear whether the MSC tax charging provisions continue to apply where Muscat is applicable. Since it is likely that at least some of the working arrangements currently within an MSC would fall to be treated in the same way as Muscat, we would welcome this point being clarified We do not consider that the travel expenses restriction sits well with the rest of the draft legislation most fundamentally, it is not clear from the calculation steps at section 61D(1) whether employment expenses (including travel) fall within the computation of the deemed employment payment We suggest that consideration be given to omitting these rules. Where a worker moves from one temporary workplace to another whilst working for the same MSC, it is difficult to justify treating their travel expenses differently from those of an umbrella company worker In fact, as the consultation document indicates, an MSC usually does not move with the worker as it would if it were really his business. Hence, each workplace is not a temporary workplace, and there is no entitlement to commuting expenses, so there is thus no need to have a new law to prohibit them We consider that it would be better if HMRC were to clamp down on the abuses of the temporary workplace rules prevalent among some providers. If the existing rules were applied consistently there would be no need to create a new legislative framework for travel expenses. 7. Managed Service Companies Transfer of PAYE & NICs debts 7.1 The draft legislation provides that, where HMRC can show that a scheme provider is providing an MSC scheme or arrangement, the resulting PAYE and NICs liability can be collected not only from the limited company but also from a range of third parties, including (in some cases) the agent and end client. 7.2 We understand why HMRC wish to extend the scope of the legislation to some agents and end users in this way namely, to make agents and end clients wary of using MSC arrangements, and also to ensure collection. However, we consider that in some areas the legislation and/or regulations are unnecessarily wide. We have commented first on the legislation and then on the regulations. 8. Transfer of debt legislation 8.1 Reasonably be expected to know We note that the consultation document clearly states: debts cannot be transferred to anyone who has simply received the services of a worker operating though a MSC or unwittingly provided such a worker. The legislation is not intended to include P/bc/subsfinal/pers

6 those who do not know or could not reasonably be expected to know that they were dealing with a MSC Similar reassurance is provided by the promise, at paragraph 1.17, that the rules exclude: an agency [which is] simply providing a worker to an end client and which did not know and could reasonably not be expected to know the worker was operating through a MSC However, section 688A(2)(c) provides that a person who (directly or indirectly) has encouraged, facilitated or otherwise been involved in the provision by the MSC of the services of the individual The use of or otherwise been involved in the provision of the worker s services indicates a potential for the much wider application of the provisions than the consultation document suggests is the intention At present, there appear to be no safeguards to prevent an agency [which is] simply providing a worker to an end client and which did not know and could reasonably not be expected to know the worker was operating through a MSC from falling within the definition of having otherwise been involved in the provision of the worker s services, despite the consultation document indicating that this is not the intention of the legislation We therefore suggest that the legislation would be more targeted if: (a) knowingly was explicitly stated; and (b) the phrase or otherwise been involved was omitted from section 688A(2)(c) This section would then apply to a person who (directly or indirectly) has knowingly encouraged or facilitated the provision by the MSC of the services of the individual Specific groups We are also concerned that ordinary employees of a scheme provider may fall within the definition at section 688A(2)(c). For instance, the provider s sales force, administration assistants, payroll clerks etc could all be considered to have been encouraging and facilitating the provision of services through a MSC We understand that HMRC may wish to collect outstanding debts from those who could be seen as the controlling minds within the scheme provider, and we also doubt that HMRC will wish to use these rules to collect from the ordinary employees. However, we consider that the legislation should seek to ensure that the latter are not within the scope of the transfer rules The draft legislation specifically excludes the application of the provisions to those who merely provide advice in a professional capacity (section 688A(3)). We welcome this, as it will exempt advisers who merely comment on the application of the legislation to particular arrangements. However, we should like to see further clarification of the position of advisers who provide other routine services (which are not advice ), such P/bc/subsfinal/pers

7 as CT or VAT returns or payroll processing. 8.3 HMRC s opinion We found it surprising that section 688A(1) allows for the collection of a liability that an officer of Revenue and Customs considers should have been deducted... rather than one which has been established as due by application of the MSC legislation. We prefer the narrower approach taken by the regulations Publicity It is possible that a number of workers will be encouraged to join arrangements which aim to sidestep the MSC provisions. In order to seek to achieve this, it is likely that the individuals involved will be appointed directors of the limited company through which they work We think it would be helpful if HMRC, perhaps together with Companies House, could inform directors of newly incorporated companies of their potential liabilities. For instance, a leaflet could perhaps be issued to individual directors, explaining their tax risks and obligations and where they can obtain further advice. 9. The Income Tax (Pay as You Earn) (Amendment) Regulations 2007) 9.1 The regulations allow HMRC to pursue a third party where HMRC is of the opinion that the relevant PAYE debt (or any part thereof) is irrecoverable from the MSC (Regulation 97B(1)(b)). We consider that the operation of this power should not depend on HMRC s opinion and that it would be preferable for the recoverability of the debt to be determined by the normal legal process. 9.2 The debt can only be transferred to wider third parties if it is either impossible or impracticable to recover it from the MSC director or provider, etc, or where the protection of the Exchequer would be prejudiced (Regulation 97B(6)). Whilst the first two conditions provide some reassurance, this is completely removed by the sweeping nature of the third condition. Is this third condition really necessary? 9.3 Where an appeal is made under Regulation 97G, it is not clear when the grounds provided for in (3)(h) to (k) may be used. For instance, if a notice is raised because it is impracticable to collect the debt from another party, can the notice be appealed on the grounds that it is not impossible (Regulation 97G(3)(h)) or only on the grounds that it is not impracticable (Regulation 97G(3)(j))? We assume the latter, but clarity on this point would be welcomed. 9.4 Interest on the transferred debt runs from the reckonable date (Regulation 97F(3)), which, it is stated, is 14 days from the end of the tax year to which the debt relates. However, a transferee is only liable to pay the debt within 30 days of the issue of the transfer notice, which may be many years later. We can understand that interest should be collected from an MSC that has defaulted, and can see that, in some situations, it may be appropriate for a scheme provider or a director or associate to be liable to pay this. However, we wonder if it is appropriate to impose an interest charge on wider third party transferees who, until the transfer notice was obtained, were ignorant of the liability which has been transferred to them. P/bc/subsfinal/pers

8 9.5 The appeals procedure provides that the Special Commissioners can determine the amount of the relevant PAYE debt and that if they do so this amount is conclusive in any later appeal (Regulation 97H(4)). Since the regulation relates to appeals by third parties, we assume that it does not restrict the right of the company to appeal the amount of the debt beyond the Special Commissioners, should it wish to do so, but it would be helpful if this could be confirmed. The Chartered Institute of Taxation 1 March 2007 P/bc/subsfinal/pers