Churchill Knight & Boox clients being investigated as Managed Service Companies

[jimmyoyang]

Hello everyone,

I've received the long-awaited standstill agreement, and after reading the discussions here, it seems that the general consensus leans towards agreeing with it. I also understand that everyone's situation is unique, so the outcome may vary to some extent.

That being said, earlier this year, I made a payment on account to cover all the outstanding figures. When I made these payments, I believed and still believe that interest would not accrue from that point onward. Given this, does it still make sense for me to enter into a standstill agreement? I have a hunch about the answer, but I'd appreciate your honest opinion. Thank you.

[ritwolf]

Hello everyone,

I've received the long-awaited standstill agreement, and after reading the discussions here, it seems that the general consensus leans towards agreeing with it. I also understand that everyone's situation is unique, so the outcome may vary to some extent.

That being said, earlier this year, I made a payment on account to cover all the outstanding figures. When I made these payments, I believed and still believe that interest would not accrue from that point onward. Given this, does it still make sense for me to enter into a standstill agreement? I have a hunch about the answer, but I'd appreciate your honest opinion. Thank you.

If I understand the latest info correctly:

What you have paid on account so far is the tax that HMRC deems to be liable, plus interest on that amount. On top of that amount, if HMRC wins you'll be fined (up to 70% of the tax liability). By accepting the agreement, you are cooperating so that the 70% fine (on top of the liability) is reduced.

FOr more info, please check the article someone shared a few posts above.

[woody1]

I thought the standstill agreement was just about NICs?

See "Protective claims and standstill agreements":

https://www.wrighthassall.co.uk/know...ill-agreements

My understanding is, if you don't enter the agreement, then HMRC will have to take you to County Court to protect their position viz-a-viz the 6-year Limitation Act 1980.

https://www.gov.uk/hmrc-internal-man...ing/dmbm527120

[ritwolf]

I thought the standstill agreement was just about NICs?

See "Protective claims and standstill agreements":

https://www.wrighthassall.co.uk/know...ill-agreements

My understanding is, if you don't enter the agreement, then HMRC will have to take you to County Court to protect their position viz-a-viz the 6-year Limitation Act 1980.

https://www.gov.uk/hmrc-internal-man...ing/dmbm527120

Yes, that's part of it. Please read the link shared above for a better understanding

[woody1]

Please read the link shared above for a better understanding

I did, and found it a bit muddled.

I also think the repeated references to "70% penalties" were a bit alarmist. Even if a Tribunal ultimately finds that CK and Boox were MSCPs, I think it's a bit of a stretch to imply that the contractors knowingly/deliberately used an MSC.

[PurelyBlue]

I did, and found it a bit muddled.

I also think the repeated references to "70% penalties" were a bit alarmist. Even if a Tribunal ultimately finds that CK and Boox were MSCPs, I think it's a bit of a stretch to imply that the contractors knowingly/deliberately used an MSC.

Yes, I agree, and I'd like to repost my comment from slightly earlier in the thread since it may have been missed and I'd be interested if anyone has answers to my questions...

Reading this article just posted on ContractorUK: https://www.contractoruk.com/news/00...agreement.html

It says:

MSC legislation leads by default to a failure to pay the correct amount of PAYE (tax and NICs) which is automatically deemed to be a ‘deliberate error.’

This sounds incorrect, and seems to completely undermine the concept of 'deliberate'. The article then uses that logic to conclude that 70% penalties could apply.

As far as I know, there's likely no penalty in the event that MSC applies, as nobody thought their companies were MSCs (and actually I expect we'll find that they weren't MSCs). Does this sound right?

Another quote:

Where a taxpayer was an agency worker in the relevant tax year, or where HMRC considers that IR35 applied in the relevant tax year, HMRC considers the use of an MSC provider to be a deliberate action, knowingly undertaken to avoid paying PAYE, either as an agency worker or under IR35.

Aren't these completely separate parts of the legislation? I thought that either one applies or the other (and MSC has precedence).

[jamesbrown]

I agree that the article is a little confused. It's unclear where the author got this information, but it's worth remembering that HMRC's position typically goes to 11 at the outset and tribunal judges can, and often do, take a different view.

Regarding legislation and ordering, the order of precedence is the onshore intermediaries/agency legislation, then MSC then IR35, but I'm not really sure what (sensible) point is being made by the author in that regard (sounds like something a non-legal HMRC person might have briefed). There is no need to use the backstop of other legislation in demonstrating deliberate behavior with regard to avoiding tax under the legislation in point, that is incoherent. What matters is whether, first, there was an MSCP "involved with" the contractor company (MSC) and, second (in terms of penalties on top of the tax avoided), whether that relationship was sought deliberately to avoid tax that was known to be owed.

[woody1]

As far as I know, there's likely no penalty in the event that MSC applies, as nobody thought their companies were MSCs (and actually I expect we'll find that they weren't MSCs). Does this sound right?

Yes. And in fact, hasn't HMRC already conceded that some companies were not MSCs?

It would be interesting to know whether Christianuyi et al incurred penalties, as this was a pretty blatant MSC tax avoidance scheme concocted by CBS.

https://www.ipse.co.uk/ipse-news/ips...-business.html

[Bruce88]

In case anyone has missed this…

How Boox’s ‘MSC contractors’ should deal with an HMRC Standstill Agreement


https://www.contractoruk.com/news/00...agreement.html

I also find this article a little confusing

’As HMRC is gearing up to extend the period of its enquiries beyond six years, it is clearly deeming the cases, if proven, to be cases of ‘deliberate error’ on the part of the taxpayer.’

I don’t quite understand this statement. I believe the ’standstill agreements’ are to simply protect the HMRC claim to NI liabilities, as the tribunals may well extend beyond the six-year period for collection.

’MSC legislation leads by default to a failure to pay the correct amount of PAYE (tax and NICs) which is automatically deemed to be a deliberate error.’’

Just because the correct amount of PAYE has not been paid does not ’automatically’ mean this is a deliberate error. I can see nowhere within the MSC legislation or guidance where this is stated. To prove deliberate behaviour requires a greater burden of proof, and the onus would be on the HMRC to make this case.

Also the original determinations sent out by HMRC went back 4 years, which is the time limit to claim unpaid PAYE tax (under reg 80) which is not due to 'careless or deliberate error'. This gives the impression that HMRC have not suggested deliberate error in this case.

[PurelyBlue]

So HMRC have confirmed that the DEP (Deemed Employment Payment) is to be calculated based on payments to the individual, rather than on payments to the company (alleged MSC). You calculate it by taking any payments to the individual which are not PAYE/salary and treating them as if they are a sum of the DEP plus employer's NI on the DEP.

Consider a dividend of £1,000. Using an employer's NI rate of 13.8%, the dividend amount is treated as equivalent to (DEP + DEP * 0.138), so:

Dividend = DEP + DEP * 0.138
Dividend = DEP * (1 + 0.138)
DEP = Dividend / (1 + 0.138)

For the example £1,000 dividend, the DEP is £878.73 (note that I'm assuming there isn't any employer's NI threshold/allowance remaining, which is likely true given most people would've paid a salary equal to or greater than that threshold). Employee's NI and income tax are then deducted from the DEP to give the take home figure.

Working from this, I've been trying to get a ballpark estimate for the potential liability when taking into account relief to prevent double taxation. It's hard to explain this in words so I've added a diagram:

My approach is to cancel the dividend, and instead treat it as DEP plus employer's NI, as I explain above and as the legislation instructs. The DEP plus employer's NI should be a cost for corporation tax purposes, so it should reduce corporation tax to that extent.

However the final outcome is confusing, as money that was previously after-tax dividends held by the individual is now retained profit in the company. I see multiple ways to resolve this:

1. Individual must repay the difference in their take-home to the company (i.e. giving it back the retained profit)
2. Retained profit must be treated as paid out as a dividend
3. Remaining profit must instead be treated as employment income
4. No relief is provided for corporation tax

For (2) the question is when the dividend is considered to have been paid. If it's considered to have been paid in the same tax year then this possibly goes against the idea of legislation (where every payment is an employment payment).

For (4) this would be clearly be double taxation as employment income and employer's NI is deductible from corporate profits.

Does anyone have thoughts about how this is worked out?