Media coverage on the schemes available to pay lower levels of tax is still gathering momentum.
But the argument appears to be shifting from whether the methods sought are for tax efficiency or tax avoidance. An emerging viewpoint also questions whether operating in such a way is morally wrong, regardless of the legal position. Government workers, mayors, comedians and even news readers have been caught in the storm. The most recent public figure to get caught out is Jeremy Paxman, who was found to be operating though a personal service company.
Paxman argued in his defence that he set the company up because he was asked to by the BBC, not because he wanted to pay less taxes. However, as far as company models go however, reports indicate that Paxman is operating a fairly standard UK-based personal service company model. This is in contrast to the exotic offshore type chosen by a fellow TV personality, who recently became the butt of jokes by others for a change.
How does this relate to Recruitment?
Are there risks to agencies in supplying workers that operate a non-standard or non-UK company model? The relevant piece of legislation is chapter 9 part 2 of the Income Tax (Earnings and Pensions) Act 2003, commonly referred to as the Managed Service Company (MSC) legislation.
Generally speaking, this legislation provides for the transfer of tax debt from company A to company B, where company A is liable for unpaid taxes which HMRC is unable to recover. Company B must also fall foul of the MSC legislation due to its relationship with Company A, in order for tax debt transfer to be possible.
After attempting to recoup the unpaid taxes from company A, HMRC will look to its directors. If the tax debt is still not recoverable, HMRC will start to look at whether tax debt transfer is possible to companies involved with company A. The rules are complex, and any non-compliance can leave a company with substantial liability in relation to another company’s unpaid taxes.
So how can agencies mitigate this risk?
Agencies can adopt practices that would limit their risk under this legislation; it is also possible for agencies to further reduce risk by limiting the types of contractors or umbrellas it does business with.
Lawspeed offers the Service Provider Audit (SPA) scheme, which is free to agencies, and lists a number of umbrella companies that have been audited by recruitment law experts. Agencies can deal with members of the SPA scheme in confidence, knowing that the relevant checks have been regularly carried out in relation to the MSC legislation.
In relation to umbrellas and personal service companies, agencies can also seek commercial protection by way of indemnities in contracts. However there is no substitute for seeking bespoke advice before dealing with umbrellas or contractors that are known to operate a non-standard or non UK company model, so agencies can make an informed decision on whether to deal with that company.
In light of the recent crackdown by HMRC, this is now as important as ever.