Churchill Knight & Boox clients being investigated as Managed Service Companies

[jamesbrown]

What's the basis for that interpretation, I wonder?

Dramatic wishful thinking and fairy dust, I expect, but no doubt one of the later tribunals will have something to say about this. I expect HMRC's argument will be that, since there is no specific timeframe on meeting the 50% rule in 61B(1)(b), and any payments to an individual's pension are eventually received by the individual, they are indirect payments to the individual, as covered by 61B(1)(b) and hence qualify. A separate question concerns the treatment of carry forward in relation to this 50% rule, but I think that will be determined to apply in the year the relief is received and not the year from which the annual allowance is carried forward. All of these are little more than guesses.

[Bruce88]

Dramatic wishful thinking and fairy dust, I expect, but no doubt one of the later tribunals will have something to say about this. I expect HMRC's argument will be that, since there is no specific timeframe on meeting the 50% rule in 61B(1)(b), and any payments to an individual's pension are eventually received by the individual, they are indirect payments to the individual, as covered by 61B(1)(b) and hence qualify.

Yes, I expect that will be the HMRC position. But I would argue that for the tax years in question, a payment (directly or indirectly) to the individual has not been made or received, it is a contribution to a pension scheme which is held in trust until such time the individual retires, that is when the HMRC recognises that a payment is made because it is at that stage the appropriate tax is paid by the individual. Indeed this payment might never be realised if the individual does not make it to retirement age i.e. premature death! So at this stage I can't see how the HMRC could argue it's a payment.

[Protagoras]

Yes, I expect that will be the HMRC position. But I would argue that for the tax years in question, a payment (directly or indirectly) to the individual has not been made or received, it is a contribution to a pension scheme which is held in trust until such time the individual retires, that is when the HMRC recognises that a payment is made because it is at that stage the appropriate tax is paid by the individual. Indeed this payment might never be realised if the individual does not make it to retirement age i.e. premature death! So at this stage I can't see how the HMRC could argue it's a payment.

As an aside, it's interesting to note that in ITEPA Ch10, 61W (2) (c) pension contributions are described as being "for the benefit of the payee".

[jamesbrown]

Yes, I expect that will be the HMRC position. But I would argue that for the tax years in question, a payment (directly or indirectly) to the individual has not been made or received, it is a contribution to a pension scheme which is held in trust until such time the individual retires, that is when the HMRC recognises that a payment is made because it is at that stage the appropriate tax is paid by the individual. Indeed this payment might never be realised if the individual does not make it to retirement age i.e. premature death! So at this stage I can't see how the HMRC could argue it's a payment.

Yep, the argument will be had. I don't believe there's any guidance from ESMs on this w/r to Chapter 9. There's an ESM on travel expenses, which basically says that any expenses that would not otherwise be tax deductible for an employee are not tax deductible for the worker/MSC and that all engagements are to be treated as a single employment w/r to the expense rules.

[Bruce88]

As an aside, it's interesting to note that in ITEPA Ch10, 61W (2) (c) pension payments are described as being "for the benefit of the payee".

There is a distinction to be made between pension payments and pension contributions. Payments are taken by the individual upon retirement and are subject to tax. Contributions are made into the pension scheme not to the individual.

[Protagoras]

There is a distinction to be made between pension payments and pension contributions. Payments are taken by the individual upon retirement and are subject to tax. Contributions are made into the pension scheme not to the individual.

Yes. I have corrected my previous post. Thanks.

[Bruce88]

Yes. I have corrected my previous post. Thanks.

I’ve had a chance to take a quick look at the legislation. It appears be specific to the DEP calculation for chapter 10, (rather than chapter 9 which is specific to MSC). In chapter 10 at the DEP calculation stage, the treatment of employer pension contributions are specifically mentioned and are excluded from the DEP. They are considered part of the overall remuneration package for the individual but not part of their paid salary. I’m not sure how it is determined if chapter 10 is applied to a business and if a similar rule to 61B(1)(b) exists in that chapter. But when determining a company’s MSC status the wording in the relevant 61B section is very specific

61B(1)(b) ‘payments are made (directly or indirectly) to the individual (or associates of the individual) of an amount equal to the greater part or all of the consideration for the provision of the services individual’

Pension contributions are not payments made (directly or indirectly) to the individual within the timeframe under consideration. Therefore, I can’t see how they would be included in the consideration for 61B, under a strict definition of the term ‘payment’.

[Bruce88]

Many business expenses would not be allowed if you were an employee / umbrella worker (think new laptop or expense a regular journey to work / your client's site) so i can see why HMRC would view those expenses (and hence nearly all expenses) as part of the calculation...

I hear what you are saying however, 61B is the section which is used to determine a companies MSC status. As I understand the legislation, at that step of the process the status of the company has not yet been determined and you are a legitimate limited company until all the steps of 61B have been considered. Therefore, at that stage, I believe justifiable expenses should be allowable to the business. It is at the latter steps 61D to 61G, related to calculating the DEP, that many expenses are unallowable because at a preceding stage (61B) it has been determined that the company is an MSC.

Regarding those expenses many company directors pay a proportion of the company bills out of their personal accounts and later reimburse themselves. For example, I pay business insurance on my personal credit card, some directors also put money into the business to help with cash flow. Surely the reimbursements related to these transactions cannot be mixed up in the ‘payment to the individual’ calculation. These are a zero sum gain to the director and an integral part of running a small company.

The fact that 61B(1)(c) is subsequent to 61B(1)(b) and states

‘the way in which those payments are made would result in the individual (or associates) receiving payments of an amount (net of tax and national insurance) exceeding that which would be received (net of tax and national insurance) if every payment in respect of the services were employment income of the individual’

suggests that only taxable payments and benefits should be included at this stage, as legitimate expense payments, director loan re-payments, etc, would never be considered taxable.

[Bruce88]

Many business expenses would not be allowed if you were an employee / umbrella worker (think new laptop or expense a regular journey to work / your client's site) so i can see why HMRC would view those expenses (and hence nearly all expenses) as part of the calculation...

Looking at 61B in its entirety.

61BMeaning of “managed service company”

(1)A company is a “managed service company” if—
(a)its business consists wholly or mainly of providing (directly or indirectly) the services of an individual to other persons,
(b)payments are made (directly or indirectly) to the individual (or associates of the individual) of an amount equal to the greater part or all of the consideration for the provision of the services,
(c)the way in which those payments are made would result in the individual (or associates) receiving payments of an amount (net of tax and national insurance) exceeding that which would be received (net of tax and national insurance) if every payment in respect of the services were employment income of the individual, and
(d)a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals (“an MSC provider”) is involved with the company.


All true PSC will come under clause (a). They would also come under clause (b) if non-taxable payments such as business expenses and pension contributions were included along with taxable payments such as salary and dividends. I can’t think of a situation where they would not unless you retained a lot of profits in the business. In these circumstances (c) would be unnecessary as you would always meet this clause if you included expense payments at (b).

The only reason I can see why clause (c) is inserted into the legislation subsequent to clause (b) is to determine if any of the taxable payments at (b) have not been subject PAYE i.e. low salary/dividend. In which case its worth proceeding with (d) because if for some reason the director did pay himself full PAYE with no expenses, then the DEP calculation would be zero.

[jamesbrown]

The legislation isn't "staged" or ordered in that way. Either the relationship is one of MSC and MSCP or it isn't. If it is, then the ordinary rules for expenses w/r to employees apply, as they would to a continuous long employment with the MSC (which is outlined in an ESM, for example), otherwise it's BAU and you can get tax relief on any legitimate business expenses.