For UK-based hirers in the public and private sector, the IR35 Off-payroll Working Rules appear to be the most powerful gun yet deployed by HM Revenue and Customs, or HMRC, in its fight against non-payment of employment taxes.
But it is just one of the many pieces of legislation that HMRC has used over the past two decades to shut down ever-more inventive ways that personal service providers maximize income. Since the original “intermediaries” legislation — known as IR35 — was passed in 2000, there have been at least six legislative attempts to plug loopholes that have been exploited by accountancy-services providers to reduce tax paid by forms of contingent labor.
And while those providers made money by devising and managing these schemes, it seems the end-users of the contingent labor and the staffing firms that acted as the middlemen may well have the deepest pockets when HMRC catches up with enforcing laws that allow HMRC to transfer the debt to other entities higher up the supply chain.
International law firm Osborne Clarke recently highlighted the risks emerging from the complex schemes that have been adopted this century in a series of articles:
- “The new disguised remuneration loan charge regime: are staffing companies and ‘onshore employers’ likely to face big retrospective claims?” (April 23)
- “Court of Appeal decision on managed service companies means major risks for accountancy service providers, staffing companies and their directors” (March 22)
- “Private sector IR35 changes in 2020 | consultation paper published on 5 March: MSPs and end users to be ultimately liable if the supply chain fails to pay tax?” (March 5)
Managed Service Company legislation. One of the most effective pieces of tax legislation was the Managed Service Company legislation that was passed in 2007. A managed service company, or MSC, is a company that (i) provides the services of an individual to another; (ii) pays that individual all or most of the fees it charges for their services; (iii) pays the individual in a way which increases the net amount received by the individual, as compared with what he would have received net if he had earned the fees as his employment income (this usually involves paying a small amount as salary and the rest in company dividends); and (iv) a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals (an MSC provider) is involved with the company.
The Court of Appeal case (Christianuyi Ltd v HMRC) discussed in Osborne Clarke’s March 22 article involved several MSCs through which health and social workers provided their services to clients. All of the MSCs were set up in 2007 by a company called Costelloe Business Services Ltd after the individuals concerned were either advised or required by an end client to use a company rather than contract to supply their services directly.
The case concerned whether Costelloe was an MSC provider, and therefore whether the companies set up by them operated as MSCs. If so, employment tax and National Insurance Contributions were due on all of the income received for the individuals’ services without having to consider, as would be the case under IR35, whether they would otherwise be deemed as employees but for their limited company.
Costelloe did not promote or facilitate the services that each of the individual owners provided to the end clients. Each individual arranged and negotiated their own contracts — including payment rates and terms — with the end clients, sometimes through a recruitment agency but without any control or supervision by Costelloe. The government’s guidance on the legislation explained that “… the presence and the role of the MSC provider is a distinguishing characteristic of the MSC. The MSC scheme provider markets MSC structures and makes them available to workers and also has an ongoing role in the administration and management of the company.”
The stinger. What does this have to do with end-user hirers or staffing firms? The sting in the tail of the MSC legislation was that it included a provision allowing HMRC to recover the tax debt from a staffing supplier or end-user client in cases where the tax could not be collected from either the MSC or the MSC provider. While that was not the case in Christianuyi, it is a possibility, and it is significant that the end user in that case had insisted the workers provide their services through a limited company, thus propelling them toward Costelloe, an MSC provider.
One-off tax charge. According to Osborne Clarke, there is also a threat from new legislation introducing a one-off tax charge on disguised remuneration loans made on or after April 6, 1999, if part or all of that disguised remuneration loan remained outstanding on April 5, 2019. Disguised remuneration loans are taxable employment income paid to an employee in the form of a “loan” which the employee was not, in reality, expected to pay back, to avoid PAYE and NICs.
The article states that some end-users and staffing companies have been contacted by HMRC in relation to this and need to be careful how they respond. If you or your contract workers have been involved in such arrangements, you should take advice on how HMRC can assess end-users, staffing companies and any other onshore intermediaries involved in loan arrangements, and what you need to do.
It is clear from the warning issued by Osborne Clarke that it is not just IR35 that end-user clients need to be wary of, and that risks may be lurking in past practices when fewer questions were asked of the supply chain.