HMRC warning on managed service company tax avoidance schemes

HMRC is warning contractors about tax avoidance schemes involving unpaid PAYE and Class 1 national insurance contributions (NICs) after its ‘emphatic win’ at a First Tier Tribunal (FTT) in the first case to test managed service companies (MSC) legislation

In its latest spotlight guidance on tax avoidance schemes, HMRC highlights a case it won at the FTT where it successfully argued that the MSC legislation (Chapter 9 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 and equivalent NICs’ legislation) applied to arrangements established and run by a third party, in this case Costelloe Business Services Ltd (CBS).

The FTT rejected the appeal by five medical contractors that their companies and earnings were not controlled by CBS during the 2007/8 and 2009/10 tax years. As a result, they now face paying taxes of £160,000 between them [Christianuyi & Ors v Revenue and Customs, UK FTT 272 TC05045]. In a separate case, HMRC is also planning to transfer tax debts to the MSC provider CBS.

HMRC’s latest Spotlight tax avoidance scheme guidance states that where a company is set up to provide a worker’s services to an engager and the MSC legislation applies, amounts paid to an MSC for those services that are not already subject to PAYE income tax and Class 1 NICs (for example, share dividends), are treated as employment income.

It states: ‘We expect those using these or similar arrangements to pay the PAYE income tax and NICs they owe following this emphatic win for HMRC. If any part of the tax and NICs are irrecoverable, HMRC will transfer unpaid debts to others, including the service company’s directors, the MSC provider and the MSC provider’s directors and associates. All are jointly and severally liable for the debts.’

The medical contractors have been granted leave to appeal. This was the first case involving MSC legislation, but the FTT indicated that there were a number of other appeals pending.

HMRC has said it will continue to open enquiries into users of similar arrangements that include the provision of workers in many different industry sectors, including road haulage, health, care and education.

It also said that promoters should carefully consider the Disclosure of Tax Avoidance Scheme (DOTAS) rules to determine if the arrangements they are marketing should be declared to HMRC.

The appellants were represented by Patrick Way QC and were clients of Mazars LLP. 

The FTT ruling in Christianuyi & Ors v Revenue and Customs, UK FTT 272 TC05045 is here

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