Churchill Knight & Boox clients being investigated as Managed Service Companies

[Chevalier]

I would lean towards the £70k. Just don't see how HMRC can claim liabilities on money which has not been paid to an employee, how can anything be disguised renumeration, if it's sitting in a company and a company bank account somewhere and never been paid to anyone?

personally I’d say 85K. Specifically with respect to the deemed payment the legislation talks about including non cash benefits.

if the Ltd that you own is now worth 15k more, presumably that would be included?

[jimmyoyang]

In the following "noddy" example, if the PSC is treated as an MSC, what figure would be subject to PAYE, £85,000 or £70,000?

Who would the agency be in this case? Taking a decent cut?

My business got the raw funds from client, then split into dividends/salary/retained profit as per your output. Am I missing something?

[Fred Bloggs]

£85000. Because the MSC legislation effectively sees through the Ltd Co such that for the purposes of calculations for tax it doesn't exist.

[jamesbrown]

For anyone who didn't see the exchange with jofo above (and has the view that it's £85k), I recommend that you review that exchange. It is very hard to argue with it when you review the legislation carefully and the corresponding ESM guidance, which describes the deemed payment procedure in a high degree of detail.

[GregRickshaw]

personally I’d say 85K. Specifically with respect to the deemed payment the legislation talks about including non cash benefits.

if the Ltd that you own is now worth 15k more, presumably that would be included?

I would imagine you and others are correct on the £85k and it may be legislation but I just can't see how they can claim tax on renumeration which hasn't been renumerated anywhere, even if deemed an MSC. Head spinning and ready to explode.

[jimmyoyang]

FYI. I spoke to my accountant today who advised the money in question that will be taxed is the dividends on top of your salary. It’s the money the business paid to the director. So, in the above diagram, it’ll be £70K. The 70K will be the figure you pay PAYE and NICs on.



What will happen beyond this, is we’d have to re-do our books and look at what corporation tax we should’ve paid, now that the dividends will be classed as salary. We will get (hopefully) get a refund of some sort but not the entire lot as we are not getting penalised on money we didn’t take out (retained profit).



We should also get a dividend refund since that figure will fall under salary now.



That’s my new take on it now.

[jamesbrown]

I would imagine you and others are correct on the £85k and it may be legislation but I just can't see how they can claim tax on renumeration which hasn't been renumerated anywhere, even if deemed an MSC. Head spinning and ready to explode.

Again, I recommend that you read a couple of pages back. It's hard to argue that it's anything other than £70k. The deemed payment is described in some detail in the legislation, even more so in the ESM and none of that is consistent with it being £85k, all of it points to £70k. Moreover, circumstantially, it aligns with the origin/intention, as noted by DealorNoDeal, which was to address composite company providers who always paid out the full amount. The scenario involving retained profit simply didn't exist because that's how legitimate companies operate. But, as with a lot of things related to this legislation, there's quite a lot of FUD.

[GregRickshaw]

Again, I recommend that you read a couple of pages back. It's hard to argue that it's anything other than £70k. The deemed payment is described in some detail in the legislation, even more so in the ESM and none of that is consistent with it being £85k, all of it points to £70k. Moreover, circumstantially, it aligns with the origin/intention, as noted by DealorNoDeal, which was to address composite company providers who always paid out the full amount. The scenario involving retained profit simply didn't exist because that's how legitimate companies operate. But, as with a lot of things related to this legislation, there's quite a lot of FUD.

Yeah thanks James, this post has been incredible in detail particularly from you. I am going to read again and probably again.

I just keep getting more confused if I am honest. Thankfully we have people like you on here to help understand.

[jofo]

I think there is a few caveats to this discussion on whether it is 70k or 85k.

The legislation is very clear that the MSC test and calculation of liability occurs at the time of each payment.

So I would say that if you close your business and distribute the retained profit whilst the MSCP is still involved in your business, then any type of payment associated with that action would be also classed as employment income.

Also, if you remove the MSCP involvement in your company, you revert to being a plain old PSC, and any future distribution of dividends etc would be not be classed as employment income.

The MSC legislation is effectively saying your not truly a director of the company, as your not acting as one and have delegated that role to the MSCP. So you should be treated as an employee of it, and not have the benefits associated with being a director. Effectively you are a disguised director!!

What it doesn't do is prove you were a disguised employee of the client, if HMRC could prove that then the IR35 legislation would take precedence over it. Again that is written in MSC legislation.

[Chevalier]

I think there is a few caveats to this discussion on whether it is 70k or 85k.

The legislation is very clear that the MSC test and calculation of liability occurs at the time of each payment.

So I would say that if you close your business and distribute the retained profit whilst the MSCP is still involved in your business, then any type of payment associated with that action would be also classed as employment income.

Also, if you remove the MSCP involvement in your company, you revert to being a plain old PSC, and any future distribution of dividends etc would be not be classed as employment income.

The MSC legislation is effectively saying your not truly a director of the company, as your not acting as one and have delegated that role to the MSCP. So you should be treated as an employee of it, and not have the benefits associated with being a director. Effectively you are a disguised director!!

What it doesn't do is prove you were a disguised employee of the client, if HMRC could prove that then the IR35 legislation would take precedence over it. Again that is written in MSC legislation.

My take is slightly different, because the deemed payment rules are slightly different, and include non-cash benefits.

So the question is - are the retained profits in your company a non cash benefit?

61F Sections 61D and 61E: application of rules relating to earnings from employment


(1)The following provisions apply for the purposes of sections 61D and 61E.

(2)A “payment or benefit” means anything that, if received by an employee for performing the duties of an employment, would be general earnings from the employment.

(3)The amount of a payment or benefit is taken to be—

(a)in the case of a payment or cash benefit, the amount received, and

(b)in the case of a non-cash benefit, the cash equivalent of the benefit.