3Sixty seminar -
HMRC surprised by industry feedback

The Detail

On 10th July HMRC issued a guidance document on the MSC legislation and as is often the case the guidance document has created more questions than answers. In response to this 3Sixty hosted a seminar on 26th July which sought to answer the recruitment industry's questions.

The main guest speaker was Robin Whytes of HMRC, and as one of the architects of the new MSC legislation, his slot was eagerly awaited by the assembled audience. Richard Clark of PWC was also on hand as a speaker to help challenge Robin and put him squarely "on the spot". Brian Keegan, Managing Director of 3Sixty, chaired the meeting attended by 70 guests, mainly agency heads, but also some End Clients and accountancy providers.

Brian Keegan opened with a brief history about what had brought about the MSC regulation and the lead up to the final Legislation, he stated the objective of the session was to help agencies make an informed decision about their future dealings with Service Providers based on Q & As from HMRC themselves.

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Background

Robin opened by explaining the reasons for the legislation. In HMRC's view, there was a worrying use of service companies to disguise employment. Although the government had IR35 legislation, enforcing it against an estimated non compliant workforce of some 250,000 would be impossible. The MSC operators knew that HMRC could not possibly prosecute them all. In addition, there was also the problem that, when HMRC enforced the law against an MSC, it promptly went into liquidation on the Friday and sprung up as another MSC on the following Monday.

Consultation documents were published in early December 2006. The final legislation was changed "quite dramatically" because it was recognised that MSCs were planning to circumvent the legislation by giving the illusion that they were not "in control".

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Is IR35 history?

Robin explained that the new Chapter 9 did not mean that IR35 was abolished. "If a service company falls outside of the MSC legislation and far more service companies will fall outside than inside, there is still a requirement to consider whether IR35 applies, on a contract by contract basis".

Robin went on to explain that the legislation was aimed "solely at those who are seeking to disguise employment relationships. HMRC do not seek to restrict the use of PSCs in genuine cases. Government has made it quite clear that it sees nothing wrong with incorporation for contractors genuinely in business on their own account."

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Transfer of Debt

On the Transfer of Debt provisions, Robin stated categorically that it was not the intention of the legislation simply to transfer the debt to the party with the deepest pockets. "It's about seeking the money primarily from those who have financially benefited from the transaction, which is clearly going to be the worker/director and the MSC provider. Only exceptionally if that proves impossible, do we move to the third parties".

Robin said that he accepted that there could be considered to be a presumption of guilt in the first two categories of transfer. i.e. HMRC can automatically transfer the debt to the worker/director of the MSC and the MSC provider. However, for persons in the third category, which includes recruitment businesses, the onus is on HMRC to actually prove that the third party encouraged the individual into an MSC. Robin stressed that HMRC has to show that there was a "conscious proactive act, not somebody innocently interacting with somebody who happens to be an MSC". Interestingly, in the draft legislation, this was phrased as "encouraged or facilitated". Robin said "facilitated" was dropped from the final legislation because during the consultation process HM Treasury received numerous objections regarding its use because the word lent itself to too wide a meaning.

Robin went through the "four main words" in the legislation and briefly defined them. Promotion did not mean somebody who promotes their business but someone who "promotes a corporate solution for individuals". Facilitation has it's ordinary meaning -helping, enabling. To define influence, Robin quoted the undersecretary, Mr Healy who gave this response in Parliament, "there is a distinct difference between someone who provides independent tailored advice for his client who can consider that advice before accepting or rejecting it and the person who simply supplies the client with a standard solution or product that the client accepts." Clearly, the emphasis has to be on "tailored" advice. Control takes on its normal meaning. It was then the turn of Richard Clark who outlined the ambiguity of the legislation and urged Agencies that if they were in doubt, they ought to obtain professional tax advice as soon as possible.

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Session Questions

The session then went on to the Questions from the floor and although this will be reproduced in more detail on the website, it is worth mentioning a few of the more important ones here. How does an agency ensure it is not caught by the debt transfer regulations if there is a rogue provider? Robin's answer was that he could not give a categoric assurance, but could help the agency mitigate risk. He mentioned two scenarios:

1. a worker comes in with his own limited company
2. a worker comes with no company and asks what he should do

In scenario 1, there is no requirement to establish whether the company is an MSC or not. But, one should caveat that with the warning that if that worker is a "Tesco's Shelf Stacker" and has his/her own PSC, that should ring alarm bells and allowing that to happen would end up with HMRC asking the question "Did you not think it was odd that this worker was going through their own limited company? ".
In scenario 2, the provision of factual info is ok eg. "you can operate through a limited company, or the employment business's payroll, or as self employed". However, saying "you would be best working through a limited company, that is risky."

Robin also commented that he was aware that PSCs and Providers are now being issued with lengthy questionnaires. Agencies do not need to go that far, he said. Transfer of debt regulations were aimed at those who are wilfully trying to avoid paying the correct amount of taxes, not the employment businesses in general.
3sixty do not necessarily agree that the nature of the engagement is a question for agencies to ask, who already have the tall task of identifying an "involved" MSC. We believe the first question should be, point blank, "Are you engaging with an MSC?"

Could HMRC issue a list of definitive questions to indicate whether a Provider was an MSC or not?

The question that an agency should ask itself was rather "is the nature of the work indicative of employment status"?

How am I able to prove to you 2 years down the line that I have taken all the steps to ensure that we were not dealing with an MSC?

Both Robin and Richard stressed the importance of keeping an audit trail, a record of the facts. This is what HMRC would require to see if the situation occurred. In terms of questions to pose to a Provider or a company, Robin said that it was probably better to get one's professional adviser to come up with a small number of questions that they are able to interpret on your behalf. The obvious question is the nature of work. If the nature of work is that of an employee and that contractor is operating through a PSC, then that begs further questions. You know what the end client's requirements are. What is the nature of the engagement?

"If you get 100 help desk workers in IT with their own companies, clearly in an employment situation, what would HMRC say 2 years from now, bearing in mind that we did not have to ask them any questions at the start"?

Robin said that ordinarily he accepted that strictly speaking, in that instance, the legislation did not apply. However, he went on, "if I am asked, how can I mitigate my risk of debt transfer down to zero? What I am saying is that on one level you can take that view, if I come to you with a company, then, irrespective of anything else, there is no need to worry. But if you want to be 100% certain, if exceptionally, the nature of the work is such that you feel it is an employment relationship, you may wish to challenge why they are operating through a PSC."
Robin appeared to contradict this later when asked the direct question "if an agency only supplies IT and if they are help desk and the nature of work is really employment then they shouldn't be in their own service company, or, if they are a specialist and they go with their own service company then that's fine?" To which Robin replied "I wouldn't like to be that direct because in industries like IT and Construction there is no black and white."

Throughout the seminar, Robin kept stressing that the legislation was aimed more at nurses, teachers, lorry drivers (without their own lorries) and "shelf stackers" not the IT sector that many felt most at threat. On IT contractors coming to the employment business with their own companies, Robin stated that "there is no reason for you to believe that is not bona fide". Robin also said that agencies were the most qualified to know what their client wanted a contractor to do. If a "shelf stacker" was in his/her own PSC, the agency should surely question "why?"

"Very often, the agency does not know into what vehicle the contractor is placed by the service provider. What is the agency's position in that situation?"

Robin's answer was that the agency should find out, because if it subsequently turns out that a group of "shelf stackers" ended up in PSCs, the agency could be facing a transfer of debt issue. If the nature of the engagement is one of employment and that person is put into a PSC, the obligation is on the agency to put it right.

Robin also said that it was erroneous to believe that HMRC was against having Preferred Supplier Lists (PSLs) for limited companies. In fact, these PSLs should be encouraged because if they weren't offered, some contractors would simply go into spurious solutions such as offshore "EBTs", LLPs, or Sole Trader schemes with UK Limited Company fronting houses, fronting house in the Isle of Sheppey and the income paid from the Isle of Mann.

Robin stated that he understood why solicitors advised clients not to touch PSCs because if that PSC turns out to be "involved", that = MSC= debt transfer. However, the government never intended to outlaw genuine PSCs and if this is having a detrimental effect on that sector, HMRC may consider clarifying the issue in the near future. The most asked question in different guises was obviously:

"How do we know for sure that the provider we are dealing with is not an MSC? Would it not be possible for HMRC to audit service providers and then issue a list of approved service providers?"

Robin's answer was that whilst this route was considered, HMRC simply did not have the manpower resource to conduct such compliance audits.

"Could there then be some sort of accreditation audits conducted by the Big 4 accountancy firms on Providers so that agencies could then be satisfied that they were dealing with bona fide companies and consequently have no subsequent threat of debt transfers?"

Robin said that he was personally quite receptive to that idea and would find out whether HMT felt the same way. If so, he would explore the possibility of an industry wide scheme where the big 4 accountancy firms would audit Service Providers under a remit provided to them by HMRC. In other words, in the absence of an official HMRC accreditation scheme, an audit from one of the big 4 would be the next best thing. (Which incidentally 3Sixty have, from none other than Price Waterhouse Coopers - see www.360-group.com)

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On the spot Q & A with Robin Whytes

What is the objective of the MSC legislation & does the treasury realise the possible implications of this legislation on the contractor market? (i.e. the possible migration to overseas/offshore companies)

The objective is to curtail the mass non-compliance by MSC providers whose core activity was to disguise employment income of individual workers who could not normally satisfy the criteria of being in business in their own right.

What are the implications for former MSCs, who are rebranding as accountants?

We are aware of several providers who have restructured their services and we will be monitoring compliance on an ongoing basis.

Can agencies work with chartered accountants? If so, is there the possibility of debt transfer?

The legislation provides a specific exclusion for professionally qualified persons who are regulated by a regulatory body. However the exemption only applies where they are merely providing professional services and are NOT involved with the service company. If a recruitment business encourages a worker to use a provider they must consider the risk of a transfer of debt. You should remember that a transfer of debt would only be incurred if the provider was involved in the service company and if HMRC were unable to recover the debt from the worker and the provider.

Do we as a recruitment business expose ourselves to risk if we do not offer an internal PAYE solution and therefore tell all workers that they must seek a suitable payment vehicle? i.e. The worker needs to find an umbrella or limited company in order to receive payment for the role.

The decision to provide a PAYE facility or not would be a commercial decision you make and is not impacted by the legislation. If you are merely stating to the worker that you do not have this facility then you are providing factual information.

Where a work seeker is offered a role and establishes a company after receiving the offer of work. If this new company is an MSC are agencies at risk of debt transfer?

If you have encouraged or been actively involved in the worker entering an MSC scheme then you could potentially be exposed to a transfer of debt.

What is the treasury's view of the advice from some sources to Employment Businesses not to have any form of Preferred Supplier list or to perform any form of compliance screening in order not to be seen as influencing the workers and thereby being at risk from the transfer of debt provision?

We understand the commercial needs and benefits of having a PSL and we do not wish to discourage the use of PSL's however the existence of a PSL can increase your exposure to risk if the PSL includes MSCs.

What is the Treasury's view of these new "Professional Services Companies" who are paying people gross as "Self Employed" provided the worker signs a statement declaring that he/she is self employed? Is this compliant and what risk exists in this arrangement?

We are aware of the existence of such schemes within the construction industry scheme and that some providers have now replicated this structure in other sectors. We are currently monitoring this.
Providing both the business and the worker hold the appropriate construction industry scheme registration gross payments are permitted. Beyond the scope of the construction industry scheme we would need to examine each case to establish if the intermediary company is acting as agency (therefore subject to the agencies act) or is in fact an employer.

What parameters / check lists are used to determine whether a company is compliant?

As described in the guidance notes the true differentiating factor between a genuine PSC and an MSC is if the Provider is involved with the company. If so then it is an MSC and subject to chapter 9 of the Income Tax (Earning & Pension) Act 2003.

What 'creative' methods do you perceive temporary workers will take to try and bypass the legislation?

We continually monitor any attempts to circumvent the legislation and will respond accordingly.

What bearing will this have on the recruitment industry?

The legislation should have no effect on those who are conducting normal employment business activities of sourcing roles and placing work seekers.

Can suppliers such as 3Sixty offer both Ltd and Umbrella Solutions?

Providing the supplier is operating within the regulations in that: - It is providing genuine PAYE umbrella services and/or - Where accountancy services are provided to PSC's the provider is not involved with the PSC. Such a provider would not be within the scope of the MSC legislation.

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Survey results

Brian Keegan finished with an electronic survey, and here are some very interesting results.

When he asked "the objective of the guidance notes is to clarify aspects of the legislation and remove any perceived ambiguity. After this seminar, do you feel that this has been achieved?" only 6% thought it had completely achieved its objective whilst 69% thought it had only partly achieved its objective.

Unsurprisingly, 91% of people thought the legislation would increase the administrative burden and cost to their businesses. 50% thought that they needed more guidance to manage the requirements of the legislation. Whilst 78% of the audience would have a PSC PSL in an ideal world, 47% definitely would not, based on their risk profile.

To underline the misconception in the marketplace which the Guidance has failed to enlighten, 48% would not use a provider with an umbrella PSL who also offered PSCs.
82% will henceforth implement MSC checks for each limited company engagement. And, whilst 79% thought the MSC legislation was necessary, only 50% thought the legislation was targeted enough to achieve its objectives.

Most worrying for government and its support for a flexible workforce, was that 90% of our guests thought that the legislation will make the UK workforce less flexible.

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3sixty go umbrella only

In our recent seminars and extensive dialogue with HMRC, it has been made clear that they do not want to discourage PSLs for Limited companies and their aim is not to effect genuine specialist providers. HMRC wishes to see agencies being able to engage with genuine PSCs with confidence. HMRC are aware that some form of accreditation needs to be in place in order for this confidence to become a reality. Whilst we are very hopeful that this will occur soon, it may take HMRC some time to obtain consensus from the big 4 on the remit and the breadth of any audit .

In conclusion, it is obvious from this seminar, that despite HMRC's view, agencies remain reluctant to refer contractors to Service Providers who offer both a PAYE Umbrella and a limited company solution. We fully understand the view of Agencies that they need to be in a risk free environment.

Therefore, until an accreditation scheme is in place to give agencies the categorical assurance they require to engage with Limited companies in a risk free way, 3sixty have decided to withdraw its Limited company offering and offer a PAYE umbrella service ONLY.

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