John Wrathmell MSC Consultation HM Treasury Room 2/N2
1 Horse Guards Road London
SW1A 2HQ
26 February 2007 Dear Sirs
Tackling Managed Service Companies
Managed Service Companies: Transfer of PAYE and NICs debts
Thank you for giving the Institute of Directors (IoD) the opportunity to respond to Tackling Managed Service Companies and Managed Service Companies: Transfer of PAYE and NICs debts, published by HM Treasury and HM Revenue & Customs in December 2006 and February 2007 respectively. This paper presents our response. Issues surrounding taxation are of considerable interest to the United Kingdom business community in general and to the IoD in particular. We are therefore pleased to participate in the consultation and present our response to the questions posed below.
About the IoD
Founded by Royal Charter in 1903, the IoD is an independent, non-party political organisation of 55,000 individual members. Its aim is to serve, support, represent and set standards for directors to enable them to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as a whole. The membership is drawn from right across the business spectrum. 92% of FTSE 100 companies have IoD members on their boards, but the majority of members, some 70%, comprise directors of small and medium-sized enterprises, ranging from long-established businesses to start-up companies.
Response: Tackling Managed Service Companies
1. We accept that the tax advantages of managed service companies are a perfectly legitimate target for a change in policy. It has not in practice proved possible to use the personal services companies legislation in this context, so another approach needs to be tried.
2. However, we are not sure that the proposed approach will work. Many of the people who currently work through managed service companies will move to personal service companies, giving a much more diffuse target for HMRC to aim at. It might be thought that many of the people who currently work through managed service companies would be incapable of
running their own companies. But some easy-to-use computer software, a computer-literate teenager in the family and some set-up help which would not bring the company within the new definition of a managed service company should be enough to bring personal service companies within the reach of many people who would not otherwise have thought of using them. They will of course be encouraged to go down that route, just as many workers are now effectively required to use managed service companies in order to take certain jobs.
3. The likely result of the proposed legislation will be to eliminate managed service companies, by imposing such costs and potential liabilities that it will be preferable to run a conventional employment business in which the staff supplied to clients are employees of the business. While it is hard to see any other way of addressing the tax and national insurance issue within the context of the current tax and national insurance system, it is regrettable that a way of doing business, which might well exist and flourish even in the absence of tax advantages, has to be eliminated in order to meet the requirements of government administrators. As a
general rule, the private sector’s choices of how to do business should not be manipulated in order to suit the purposes of bureaucrats.
4. This proposal will increase the tax take, which in itself is bad for the economy. Public spending may be beneficial, but the taxation which is needed to pay for it is damaging. While it may well be right to change the rules for managed service companies in order to take away their tax
advantages, it is most regrettable that no plans were announced to recycle the extra tax revenue by reductions in other tax burdens, so as to keep the total tax burden on business stable. It is not even clear that someone who does continue to work through a managed service company will enjoy all of the social security benefits that someone who is an employee of a substantial enterprise would enjoy. (We understand that an employee of a one-man company can for example be denied Jobseeker’s allowance.) 5. Clauses 61B and 61C. The rules do not include any parallel to the
personal services company rule that the special tax consequences only follow if, disregarding the company, the worker would have been an
employee under the usual status tests. The assumption seems to be that if a worker is not running his or her own company, he or she cannot be an entrepreneur so employment-type tax rules ought to apply. We understand the reason for this approach. Including a test of status would make the new rules as impractical as the old rules. But this is a significant change of approach. In the area of managed service companies, the standard
conception of the boundary between employees and the self-employed will not apply.
6. Clause 61B(2)(c). The document explains that “control” will have its
general meaning, not one of the special meanings given in tax legislation. We suggest that this needs to be said, in the legislation. Guidance notes will not have any legal force, and the reader of legislation may not be aware that they exist.
7. Clause 61E(4). It is not clear that there is enough in the legislation to
determine whether the benefits code for those earning at least £8,500 a year or the code for lower-paid employees should apply. Does the legislation say that one looks at the total level of reward obtained by the individual from the managed service company?
8. Clause 61F(4) and (5). It is not clear why the factors that would make a
payment by the client direct to the worker non-taxable need to be specified. Would it not be sufficient to have just clause 61F(4), with the words “by reason of any combination of the factors mentioned in
subsection (5)” deleted, and to omit clause 61F(5)? That would make the legislation more robust, in that it would not need amending if future legislation introduced new grounds on which ordinary earnings were not chargeable.
9. Clause 61G. It would appear that in order for this clause to work, “a
distribution” must refer to a payment to a specific worker, rather than to all of the payments made on a given occasion to the holders of a specific class of share. Otherwise, clause 61G(5)(b) would not appear to make sense. Is it certain that “distribution” has this meaning of a payment to a specified person (or perhaps even a payment in respect of a specified share, so that someone who held ten shares of the same class would receive ten distributions at once)?
10. Clause 61G(5)(b). There might be different other people, with different
rates of tax, who had received distributions to which relief could be assigned. An ordering rule may be needed. The power given to an officer to act appropriately, conferred by clause 61G(3), might be thought to cover this, but it would be better not to give such discretion if the point could easily be covered by legislation.
11. ITTOIA section 164A. It would be helpful to clarify whether the profits
referred to in section 164A(4) are only the trading profits (as in
subsections (1) to (3)) or all profits. The opening words of subsection (1) would suggest that only trading profits are meant. The same point applies to paragraph 7(4) of the draft schedule, except that the use of the word “business” in paragraph 7(1) means that it does not even suggest that trading profits are meant. The Government probably wants to mean trading profits, both in section 164A and in paragraph 7, so as to block schemes which put other sources of income into the same entity. 12. ITTOIA section 164A. Subsection (6) does not allow for any
administrative expenses. This would appear to put a managed service company organised as a partnership in a worse position than a personal service company with its 5% allowance. The same point applies to paragraph 7(6) of the new schedule.
Response: Managed Service Companies: Transfer of PAYE and NICs debts
13. We accept the need to allow some debt transfers. But we are concerned about the reach of the proposals. It is perfectly reasonable to transfer
debts to the operators of managed service company schemes or to directors or office-holders of managed service companies. It is not at all clear that debts should be transferred to the agencies which find work for the workers or to the clients for whom the workers actually work.
14. The general approach of the legislation is that a debt can be transferred to someone who was involved, without a requirement for that person to be culpable in any way. This is a major policy development, and its
underpinnings need to be challenged. It effectively says that the interests of the Exchequer should trump the interests of an innocent party in the private sector. But private sector companies need to avoid a loss of money just as much as the Exchequer. To allocate a pound to the public sector is not more virtuous than to allocate it to the private sector. An innocent party saddled with a tax debt will see the rules as an example of the self-importance of government.
15. Both agencies and clients will face difficulties. It is essential that HMRC should issue a checklist which they can use to find out whether they are dealing with a managed service company. Any such checklist should take less than ten minutes and cost less than £20 to complete. If it is completed in good faith and the answers indicate that no managed service company is involved, the agency or client should be safe from any transfer of a tax debt.
16. Section 688A(5). This is a Henry VIII power, and is ipso facto
unacceptable. It should be deleted.
17. Regulation 97B(1)(b) and (6). “Opinion” should read “reasonable
opinion”. Administrative law requirements of reasonableness may well be imported by the use of the word “opinion”, but this would not be obvious to the untrained reader, and in any case the administrative law background might change.
18. Regulation 97B(6)(b). “Impracticable” allows HMRC very great scope to
use these provisions. It could for example mean impracticable given that HMRC have decided not to allocate sufficient resources to the recovery of debts from the parties primarily liable. Something narrower should be used.
19. Regulation 97B(6)(c). This regulation appears to say that HMRC can
re-allocate debts simply because they are running out of time, even though the delay may be their own fault. This is not satisfactory.
20. Regulation 97G(3)(h), (j), (k) and (l). Should the references to section
688 be references to section 688A?
21. Regulation 97L(2). HMRC should be required to repay excessive
amounts without delay, rather than without unreasonable delay.
Companies can go bust, and people be thrown out of work, because of delays in tax refunds.
Yours sincerely,
Richard Baron Head of Taxation
The Institute of Directors 116 Pall Mall
London. SW1Y 5ED Tel 020 7451 3212
