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Transfer of Debt

In the light of the problems primarily caused by the rise and growth of Managed Service Companies (MSCs), the Treasury issued its second consultation document, which clarifies the perceived ‘grey areas’ of transfer of unpaid PAYE contributions.

The proposals

The government identified a problem in collecting taxes and National Insurance Contributions (NICs) from some composite companies. It therefore proposed to make all third parties (as defined below) liable for any PAYE/NIC debts, should the composite company be closed in the event of a challenge from HM Revenue & Customs.

The burning question is, who exactly would be treated as a third party? Well, we’ll try to lay it out for you as clearly as we can.

Closely Connected Parties

Third parties fall into two areas. The first consists of those entities that are automatically included within the scope of the legislation. They are the scheme provider, the directors, officers and associates of the MSC and the contractor.

Third Party Connected

The second area includes any other party who knows or can be reasonably expected to know, about the scope of the provision of services. This includes any agency that has either a preferred supplier list or an exclusive arrangement with a scheme provider. This group also includes employers who outsource work directly to contractors.

It should be noted that third parties are only affected if the debt (Tax and NICs) cannot be collected within the scope of the 'Closely Connected Parties.' This is an important aspect of the legislation, as there will be an appeals process attached.

The next question we need to ask is who would HMRC not treat as a third party?

  • The legislation is not intended to include those who do not know or could not reasonably be expected to know, that they were dealing with an MSC.
  • Those agencies or clients offering contractors work, but who do not specify or recommend a scheme provider to undertake the provision of those services.
  • Accountants and lawyers who give professional advice.

How would the debt be collected and by whom?

  • In the first instance, HMRC will try and recover this debt from the MSC.
  • In the event that the MSC has no assets and the debt cannot be recovered, HMRC will issue a transfer notice to any 'Closely Connected Parties' on a joint and several liability basis.
  • In the event that the debt is not recovered from the 'Closely Connected Parties', HMRC will issue a transfer notice to any other party it feels could, or should, have known about the scheme provider's solutions. Again, this will be on a joint and several liability basis, although HMRC may only be able to identify one other entity, e.g. the agency.

The following are not an MSC Provider by virtue of the activity described:

  • A firm of accountants carrying on a business of being accountants (irrespective of the percentage of the client base which is individuals operating through service companies)
  • A Tax Adviser carrying on the business of being a Tax Adviser generally
  • A Company Formation Agent
  • A Chartered Secretary
  • An Employment Business/Agency undertaking its core business of placing work seekers (including those operating through companies) with end clients
  • Service providers providing services to companies generally, for example insurance companies, payroll bureaux etc
  • A Trade Association operating in the service sector
  • A PAYE Umbrella Company as all the income is paid via the PAYE system.

To find out more

Simply give our experienced New Business Team a call today on 0800 848 8888, chat to us online or feel free to submit your query using our quick online form

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