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HMRC Monitoring New MSC Legislation

by Robert Lee,, London

29 August 2007

As part of its monitoring of the effects of Chapter 9 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), the UK's Revenue and Customs has announced that it intends to write to known Managed Service Companies (MSCs) to request "limited information" on the type of services provided to clients. HMRC is also taking a stand against offshore arrangements that claim to be outside of the legislation.

HMRC said on Wednesday that the provision of the requested information from such service providers is "purely voluntary" but that it expects a good response, as many service providers advertise their business models.

"The letters asks Service Providers for limited information on the business models provided to clients and the numbers of clients within each business model," the department explained.

UK legislation to clamp down on MSC came into force earlier this month, and will subject all payments received by individuals providing their services through such organizations to PAYE and National Insurance. Chapter 9 was inserted into the ITEPA in the Finance Act 2007, and creates a tax charge on income regarded as deriving from employment.

An estimated quarter of a million workers - including teachers, nurses, construction workers, IT specialists and electrical contractors - use MSCs to manage their professional remuneration in a tax-efficient way. Operating through an MSC, the worker is treated as a shareholder. This means that they receive a minimal wage (which is taxable and subject to national insurance contributions) and the remainder of their remuneration is in the form of dividends, which are not subject to national insurance, and attract a lower rate of tax than other forms of income.

Compliance specialists have warned that all third party organisations that employ contractors and MSCs will also be targeted unless they make an effort to come into compliance with the new legislation.

Employment agencies are most likely to be affected, but the new rules could expose end users (the organisations which ultimately engage the services of the worker involved) to risks. Tax experts say that such firms will need to ensure that they have due diligence processes in place to monitor practices all the way along their labour supply chains.

The Treasury estimates that cracking down on workers from operating via MSCs could yield it as much as GBP350 million per annum.

HMRC added that it has become aware of a number of offshore arrangements providing the services of workers to UK clients which claim to be outside Chapter 9 ITEPA. Some of these also argue that Chapter 8 (IR35) and Chapter 9(MSCs) do not apply in offshore locations.

"Such statements are misleading," the department argued. "Where a worker is resident in the UK and the work is carried out in the UK, the intermediary (in Chapter 8) or MSC (in Chapter 9) is treated as having a place of business in the UK and, subject to other qualifying criteria, Chapter 8 and 9 do apply."

HMRC added that it is also aware of the marketing of arrangements on the Internet which appear to fall within the scope of Chapter 9 ITEPA, in that they are marketed on the basis of saving employer’s NICs, and marketed to workers historically providing their services under contracts of service.

"Where HMRC compliance activity identifies a failure to apply Chapter 9, and the consequential PAYE and National Insurance liability is irrecoverable from the MSC, HMRC will consider the transfer of debt provisions," the department stated.

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