Monitoring the effects of the legislation

As part of HMRC’s monitoring the effects of Chapter 9 ITEPA, letters will be issued shortly to those known Service Providers whom HMRC believes to be MSC Providers. The letters will asks Service Providers for limited information on the business models provided to clients and the numbers of clients within each business model.

Provision of the information is purely voluntary but as many Service Providers advertise their business models, HMRC anticipates a good response.

Recruitment Businesses

Some Service Providers report that Recruitment Businesses are refusing to deal with Service Providers who provide service companies to workers. It is clearly important that Recruitment Businesses consider the implications of the transfer of debt provisions and take reasonable steps to mitigate their exposure to those provisions.

However, it is important to remember that the legislation was introduced to address the issue of workers seeking to avoid employed levels of tax and NICs. It was not introduced to stop those genuinely in business on their own account providing their services though service companies. HMRC has provided guidance to help Recruitment Businesses take a balanced view on their risk under the transfer of debt provisions.

Current arrangements

HMRC is aware of a number of offshore arrangements providing the services of workers to UK clients which claim to be outside Chapter 9 ITEPA. Such arrangements may be outside the legislation. However, irrespective of the claims made by the Service Providers, if any of these arrangements fall within Chapter 9 and there is subsequently an irrecoverable PAYE/National Insurance debt, HMRC will consider the transfer of debt provisions.

Some offshore arrangements claim that Chapter 8 (IR35) and Chapter 9(MSCs) do not apply in offshore locations. Such statements are misleading. Where a worker is resident in the UK and the work is carried out in the UK, the intermediary (in Chapter 8) or MSC (in Chapter 9) is treated as having a place of business in the UK and, subject to other qualifying criteria, Chapter 8 and 9 do apply.

HMRC is also aware of the marketing of arrangements on the Internet which appear to fall within the scope of Chapter 9 ITEPA in that they are marketed on the basis of saving employer’s NICs and marketed to workers historically providing their services under contracts of service. Where HMRC compliance activity identifies a failure to apply Chapter 9, and the consequential PAYE and National Insurance liability is irrecoverable from the MSC, HMRC will consider the transfer of debt provisions.