A recent decision by the tax tribunal serves as a timely reminder why both contractors and agencies need to be aware and cautious of potential liability under the Managed Service Company rules, specifically that being complicit in the tax arrangements is not a requirement for debts to be transferred to other parties involved in the supply chain.
The case of Gradidge v HMRC, involved an individual, Mr Gradidge, providing services through a PSC, of which he was the sole director and shareholder. However, the PSC had been set up and managed by an entity called Think Accounting Limited (‘TAL’). The evidence was that Mr Gradidge had been referred to TAL by an agency and that TAL actively managed the PSC. It was accepted that the PSC should be considered a managed service company (‘MSC’) and TAL were acting in the capacity of a MSC Provider (‘MSCP’) and therefore, under the MSC rules a PAYE debt was due.
At some point the MSC was dissolved and HMRC sought to transfer debt, under the MSC debt transfer rules to Mr Gradidge, who was held liable for the unpaid taxes by the tribunal. Mr Gradidge was told to work this way and was neither knowingly involved in the arrangements nor seeking a tax benefit. However, the tribunal stated, ‘the purpose of the legislation was to ensure that those who benefited from such arrangements, even without any intent to do so, should be liable in order to ensure a level playing field’, clearly being complicit is not a prerequisite for MSC debts to be transferred.
It remains to be seen what the eventual outcome of this case may be. However, under the debt transfer rules, if an MSC debt cannot be recovered within a reasonable time HMRC can also pursue the debt against the MSCP or, potentially, the agency.
Understanding the risks posed by your supply chain, and the steps that can be taken to mitigate those risks is essential for recruitment businesses and hirers.
To find out more about risk and liability in this challenged sector come to this Lawspeed seminar on 14th July, where Lawspeed experts will review worker and contractor ‘umbrella’ tax issues in conjunction with HMRC and BEIS representatives.