MSC Debt Transfer Notices in Last Tax Year

Avalanche of MSC debt transfer notices in last tax year

Following a Freedom of Information request by Recruiter magazine, it has been revealed that HMRC issued 981 debt transfer notices in the year ended 5^th April 2013 in an attempt to recover debts of nearly £1.5 million. This represents a huge increase in comparison to the two previous years; nil in 2011/12 and 142 in 2010/11.

S.688A ITEPA 2003 was introduced to address the historical problem of managed service companies (MSC) escaping their PAYE and NIC debts by simply winding up their companies or ceasing to trade and shifting workers to a new MSC, made easy by the fact that MSC's generally have no tangible assets. The legislation therefore enables HMRC to seek recovery of the PAYE and NIC liabilities from other parties where it is not possible to collect such from the MSC within a reasonable period.

HMRC would consider an MSC with no assets that offers to pay a £50,000 debt in instalments of £500 per month to be irrecoverable within a reasonable period.

Categories

There are four categories of person to whom a debt can be transferred:

• The director, or other office holder or associate of the MSC;
• The MSC Provider (MSCP), or the director, or other office holder or associate of the MSCP;
• A person who directly or indirectly has encouraged or been actively involved in the provision by the MSC of the services of the individual; and
• A director or other office-holder, or an associate, of a person (other than an individual) who is within paragraph (2) or (3). 

Although all persons in the above categories are jointly and severally liable for the debt it does not mean that all persons will be required to pay the debt.

Transfer notices must be issued firstly to persons in category (1) but where the debt cannot be recovered from such persons, HMRC will then issue Transfer Notices to persons in category (2). In practice however HMRC will consider the financial position and ability to pay of all persons in the first two categories simultaneously. If there are no reasonable prospects of recovering the debt from those in category (1) then Transfer Notices will be issued to all persons in categories (1) and (2) at the same time.

Before Transfer Notices can be issued to persons falling in categories (3) and (4) HMRC have to certify that it must be impracticable to recover tax and NIC's from those in the first two categories. Legislation does not define “impracticable” but where a person is resident outside the UK and has no UK assets or a person is insolvent then this will satisfy that definition.

An exemption from category (3) for those providing legal or accountancy advice in a professional capacity is afforded by S.688A(3)(a). Activities that go beyond this however will negate the exemption but it does not automatically mean that the debt transfer provisions will apply. This will depend on the services they provide and their interaction with the MSC.

Transfer of debt provisions took effect from 6^th August 2007 for MSCP's and directors of MSC's but from 6^th January 2008 for other third parties. After a number of apparently inert years HMRC have now stepped out of the shadows as they believe that some MSCP's are using the MSC model to maximise contractors' income achieved in no small way through tax avoidance.

It is imperative that any contractor contemplating or even currently using the services of an MSCP understands the full tax implications. Even if a company is an MSCP it does not automatically follow that the MSC rules will apply. This will depend on whether or not an MSCP is 'involved' with its client. This is where Qdos can provide clarity by way of an MSC audit. The audit examines all aspects of the providers business model and its relationship with its clients culminating in a report that will highlight any MSC risks and how these can be remedied. Further details can be obtained by contacting the Qdos consultancy manager, Kate Hardy, on 0116 2690 992 or by e-mail [email protected].