Churchill Knight & Boox clients being investigated as Managed Service Companies

[CA100]

Regarding transfer of debt, there are effectively three categories and, while they are jointly and severally liable, they are ordered. The first category is the MSC and its directors and office holders. The second category is the same for the MSCP. The third category is associated people. In practice, the third category is a last resort and there must be no reasonable prospect of collecting from the first two categories before transfer to someone in the third. But the first two categories are still ordered and the first category will be exhausted first. So, yes, the MSCP and its relevant individuals are at risk, but they are in the second category and they will be approached after the first category.

Would you happen to have a reference for this rule?

[jamesbrown]

Would you happen to have a reference for this rule?

Not for all parts in one, succinct, and easy-to-read place (that I recall). The first place to look is the legislation itself. Notably, the transfer of debt provisions:

https://www.legislation.gov.uk/ukpga...1/section/688A

Note that there are actually four categories but the fourth one cross-references the second and third, so there are effectively three, as noted in the HMRC internal manual (below).

The second place is the HMRC internal manual, notably:

https://www.gov.uk/hmrc-internal-man...manual/esm3625

The third place is legal/professional commentary, which you can find everywhere.

[Fred Bloggs]

Cough, Brookson. There will be many others, though. Especially look out for accountants with bespoke portals that package things in a way that looks like a "solution", such as different levels of service or umbrella plus accountancy under one roof (depending on how things go with CK/Boox, the latter is going to be a big issue, IMHO, as others have pointed out too).

I agree. Add to the list anyone who flipped overnight from being composite company providers to "accountants". The only thing that truly surprises me about all this is that it took so long for HMRC to act.

Yes. And switching clients between Ltd Co and brolly and back? Slam dunk, guilty as charged.

[eek]

Yes. And switching clients between Ltd Co and brolly and back? Slam dunk, guilty as charged.

That's the end point I believe HMRC are aiming towards - and no tax advisor has disagreed with that assessment.

[jamesbrown]

That's the end point I believe HMRC are aiming towards - and no tax advisor has disagreed with that assessment.

You can see why it's their end goal, other than the potential tax. I mean, on the face of it, there is a smell about switching from being "in business" to effectively "not in business" at the drop of a hat, even though IR35 is largely contract/WP dependent.

[Fred Bloggs]

You can see why it's their end goal, other than the potential tax. I mean, on the face of it, there is a smell about switching from being "in business" to effectively "not in business" at the drop of a hat, even though IR35 is largely contract/WP dependent.

Absolutely. And what's more, anyone who did the in/out/in/out in my opinion is stupid and should have thought very very carefully about the signals it sent out. And the too greedy for more market share accounting firms too. I don't have any sympathy at all.

[CA100]

Not for all parts in one, succinct, and easy-to-read place (that I recall). The first place to look is the legislation itself. Notably, the transfer of debt provisions:

https://www.legislation.gov.uk/ukpga...1/section/688A

Note that there are actually four categories but the fourth one cross-references the second and third, so there are effectively three, as noted in the HMRC internal manual (below).

The second place is the HMRC internal manual, notably:

https://www.gov.uk/hmrc-internal-man...manual/esm3625

The third place is legal/professional commentary, which you can find everywhere.

Are you taking it that because the categories are listed in a certain order the priority sequence follows that order? I don't see that explicitly confirmed anywhere?

"The legislation requires that before a debt can be transferred to a person within the third category above, it must be impracticable to recover the debt from a person within the first two categories" - there's an implication here that the first 2 categories are equal.

If you look here https://www.gov.uk/hmrc-internal-man...manual/esm3635 Step 8, it is saying it's up to the officer what the allocation between categories 1 and 2 is.

[GregRickshaw]

Their end goal is always to benefit from the mess and confusion they create from their own rules and legislation vagueness.

[jamesbrown]

Are you taking it that because the categories are listed in a certain order the priority sequence follows that order? I don't see that explicitly confirmed anywhere?

Not superficially, no.

There is an unambiguous ordering between categories 1 and 2, on the one hand, and category 3, on the other hand. Specifically, category 3 should be pursued last.

"The legislation requires that before a debt can be transferred to a person within the third category above, it must be impracticable to recover the debt from a person within the first two categories" - there's an implication here that the first 2 categories are equal.

No, I think you're misreading it. The distinction being made here is between category 1 and 2, on the one hand, and category 3 on the other hand, which we know from the legislation is a clear distinction. It is silent about the ordering within category 1 and 2. This merely points to an analysis of the positions of relevant persons (in the broad sense of that word, including corporate persons) within category 1 and 2, including their ability to pay. That makes sense, given the distinction above between 1/2 and 3. This distinction between 1/2 and 3 should not be conflated with equality of 1 and 2.

Another thing to clarify is that the MSC itself will be pursued before any attempt to transfer the debt to a third party, in other words all third parties come after the MSC has been pursued. The debt is the MSCs, initially.

The Employment Status & Intermediaries team (ES&I) should, where necessary, issue a Determination under Regulation 80/Decision under section 8. If the Determination/Decision is appealed, whilst the appeal process proceeds, identify whether the MSC has the financial ability to pay the liability - see ESM3680 for areas to consider. Where it does not, identify the persons to whom the debt may be transferred and ascertain each person’s financial position and ability to pay the debt.

My emphasis. Perhaps this was already clear, though.

Another thing to bear in mind is that you can only get a Reg 80 if your PSC (alleged MSC) is still "live" and if it is still "live" then there's a hook for HMRC because dividends can be declared ultra vires and corresponding debts established on the DL account. Obviously, if it's liquid, then that is where the deemed payment will come from initially.

All that said, I agree there is more ambiguity about the distinction between category 1 and 2 than between category 1/2 and 3. Nevertheless, having read around this quite a bit (including professional/legal analysis), the assumption is that the numerical ordering of the three categories corresponds to the order in which they will be pursued, after the MSC itself.

[CA100]

All that said, I agree there is more ambiguity about the distinction between category 1 and 2 than between category 1/2 and 3. Nevertheless, having read around this quite a bit (including professional/legal analysis), the assumption is that the numerical ordering of the three categories corresponds to the order in which they will be pursued, after the MSC itself.

Completely agree on the ambiguity from HMRC!

The HMRC guide on debt transfers states:

"Step 8: Submission to Debt Transfer Team for consideration of issue of Transfer Notices
Submit the case to the Debt Transfer team for consideration of the transfer of debt. Include:

A declaration signed by an officer not below Higher Officer grade that they are of the opinion that the debt - the specified amount - is irrecoverable from the MSC in a reasonable period
Evidence in support of the above declaration - see flowchart ESM3680
The names and addresses of the persons in the first two categories together with details of their financial position/ability to pay - see flowchart ESM3680
A recommendation regarding which persons within the first two categories should be issued with Transfer Notices and the reasons why"

If you then follow the link to that flowchart, the relevant section is:
"Step 5: Ascertain potential transferees’ ability to pay the MSC debt:

Use information available to the Department and commercially. Liaise with appropriate sections within Department (e.g. DMB).
If there is evidence that persons in the first two categories have the financial ability to pay the debt (and any other associated debts) restrict enquiries regarding persons in the third category accordingly.
If there is evidence that persons in the first two categories do not have the ability to pay (or their assets are alienated).
Remember that there are strict time-limits for the issue of Transfer of Debt Notices, and actions to determine potential transferees and their ability to pay should be undertaken as quickly as possible."

I read this as HMRC make a decision on allocation of debt between category 1 and 2. If Boox are still going at a future time of the case being lost, you would think as a business they should have more capital than an individual so should have at least some allocated to them.

I guess it's an untested assumption until the cases actually proceed, as with so much of this situation. We're relying on speculation, even from the experts, because of the absence of precedence.