Churchill Knight & Boox clients being investigated as Managed Service Companies

[Sijo]

Right. Perhaps WTT didn't really communicate this point as they intended, but there was an explicit question about it and I am pretty certain I am reporting what they said accurately because the question was an either/or (either it is on all income paid to the intermediary or it is on all income paid to the individual). It would be pretty lenient to be the latter, since you could basically retain most/all profit and then what? Pay it out in future years, say 5 or 10 years later or on liquidation?

I think it would be the amount paid to the worker as dividends and expenses. So for calculating deemed employment, they would add anything paid to the worker (director) via, salary, dividend, and expenses from his MSC. One section also states the fact on paying dividends to your wife (worker's associate). That would also be treated as an income to you.

https://www.gov.uk/hmrc-internal-man...manual/esm3535

The below link gives details of all rules associated with MSC.

https://www.gov.uk/hmrc-internal-man...manual/esm3500

[Hareforthebear]

This is the link HMRC provided as to how they have come to the calculation. Maybe someone else understands it as I can’t get my head around the wording of it. ?

https://www.gov.uk/hmrc-internal-man...manual/esm3535

[eek]

I think it would be the amount paid to the worker as dividends and expenses. So for calculating deemed employment, they would add anything paid to the worker (director) via, salary, dividend, and expenses from his MSC. One section also states the fact on paying dividends to your wife (worker's associate). That would also be treated as an income to you.

https://www.gov.uk/hmrc-internal-man...manual/esm3535

The below link gives details of all rules associated with MSC.

https://www.gov.uk/hmrc-internal-man...manual/esm3500

And the second link says

What this means in practice is that any payment or benefit received by the worker, not already subject to PAYE, Tax, and Class 1 NICs, is liable both to Tax and (from 6 August 2007) Class 1 NICs. For NICs purposes, the MSC is treated as the secondary contributor.

So you can see where the confusion lies as one set of the documentation says 1 thing (all payments received by the PSC) and the other half says something else entirely (just payment / benefits to the worker).

[Sijo]

This is the link HMRC provided as to how they have come to the calculation. Maybe someone else understands it as I can’t get my head around the wording of it. ?

https://www.gov.uk/hmrc-internal-man...manual/esm3535

I think earnings would be the part which we received as salary and any other amount we received from the MSC will be put in Step 1

[jamesbrown]

I think it's pretty clear how the deemed payment works for IR35, which is on all income received by the intermediary. There are countless examples/tribunals of this working in practice. I highly doubt it is any different for the MSC legislation, but I will check when I have a moment.

[Guy Incognito]

Note - if the flowchart at the end represents the law HMRC hasn't got a leg to stand on so I don't think the MSC flowchart shown is the one HMRC are working with.

The flowchart is copied from a document from 2006 I think HMRC have changed their view of what an MSC is since then!

[jamesbrown]

Here is the part of ITEPA Part 2 Chapter 8 (IR35) that deals with deemed payments, clause (54):

https://www.legislation.gov.uk/ukpga...rt/2/chapter/8

In particular:

Find (applying section 55) the total amount of all payments and benefits received by the intermediary in the year in respect of the relevant engagements, and reduce that amount by 5%.

[Guy Incognito]

And the second link says



So you can see where the confusion lies as one set of the documentation says 1 thing (all payments received by the PSC) and the other half says something else entirely (just payment / benefits to the worker).

So the HMRC Guidance says payments to the MSC but the HMRC Handbook says payments to the worker.

I assume (hope) those HMRC staff doing the determinations will use the handbook (ESM3535 - Managed Service Companies (MSC): Calculating the Deemed Employment Payment (DEP)) and hence it should be only payments to the worker.

My determination (which is not an estimate) doesn't seem to match either method.

[jamesbrown]

The corresponding provisions are in clause 61E of ITEPA Part 2 Chapter 9 for MSCs:

https://www.legislation.gov.uk/ukpga...rt/2/chapter/9

This is a bit more circuitous, but we only care about the first step, the starting point.

Step 1

Find (applying section 61F) the amount of the payment or benefit mentioned in section 61D(1)(b).

And 61F says:

(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.

This does not mean the amount received by the office holder and/or shareholder that was paid to them by the MSC. It means the amount that would be received if received by an employee for performing the duties of an employment. Thus, you look through the MSC structure and find the amount that would've been received directly by an employee were that person to be employed by the MSCP.

In other words, all income, subject to deductions mentioned in later clauses.

[eek]

Here is the part of ITEPA Part 2 Chapter 8 (IR35) that deals with deemed payments, clause (54):

https://www.legislation.gov.uk/ukpga...rt/2/chapter/8

In particular:

But Chapter 9 is clear Income Tax (Earnings and Pensions) Act 2003 (legislation.gov.uk)

Worker treated as receiving earnings from employment


(1)This section applies if—

(a)the services of an individual (“the worker”) are provided (directly or indirectly) by a managed service company (“the MSC”),

(b)the worker, or an associate of the worker, receives (from any person) a payment or benefit which can reasonably be taken to be in respect of the services, and

(c)the payment or benefit is not earnings (within Chapter 1 of Part 3) received by the worker directly from the MSC.

(2)The MSC is treated as making to the worker, and the worker is treated as receiving, a payment which is to be treated as earnings from an employment (“the deemed employment payment”).

(3)The deemed employment payment is treated as made at the time the payment or benefit mentioned in subsection (1)(b) is received.

Quoting all that because you need to see subsection 3 to discover that it references subsection 1b which talks about payments to the worker not payments to the MSC / PSC..

Yet it's also clear the HMRC refer to Deemed payments in Spotlight 32 so you can see the cause of the confusion (either HMRC are themselves confused, they are pushing things or they know what is in Chapter 9 isn't good enough so wish to change it)

Basically I don't think anyone including HMRC have a clue what the payment should be based on - so I can see why WTT were careful not to answer because the answer seems to be no-one has an actual clue.