Agencies risk 3rd party debt transfer under MSC Legislation.
If you’re a recruiter referring your candidates to an umbrella provider; What do you do to ensure that the provider is operating compliantly? Do due diligence checks cover every eventuality? Do you know what you need to about a Managed Service Company?
Are you aware of the risks and potential costs you could be exposing yourself to by referring your contractors to non-compliant providers? Let’s put it simply, the risks are huge!
If the provider is found to be an MSC (Managed Service Company) the transfer of 3rd party debt regulations can be brought by HMRC. The MSC regulations allow HMRC to pursue 3rd parties (including the recruitment agency involved) for the unpaid debt of the MSC.
Managed Service Companies are still out there! Still operating outside the rules, but the clampdown on any tax avoidance schemes by HMRC is rising. HMRC are increasing their activity on this front in an attempt to recover debts easily in excess of £1.5 million and that is just for MSC’s. This doesn’t take into account any use of offshore avoidance schemes!
MSC Debt Transfer Notices
Tax Year: Debt transfer notices issued by HMRC
So what exactly are the risks of engaging with a Managed Service Company?
There are a few directions in which a debt can be transferred:
1) The director or other office holder of the MSC
2) The MSC provider, or director or other office holder of the MSC
3) Crucially – a person who directly or indirectly encouraged the provision of the MSC services.
Effect of the MSC legislation
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 National Insurance contributions (for example, share dividends), are treated as employment income.
HMRC’s firm view, now supported by the cases covered in Spotlight 32, has always been that these types of arrangements do not work. HMRC continues to open enquiries into users of similar arrangements that include the provision of workers in many different industry sectors, including road haulage, healthcare and education.
Due diligence checks are so important, but may well not show up everything you need to know to provide security to your contractor, yourselves and your end clients. So proceed with caution!