Churchill Knight & Boox clients being investigated as Managed Service Companies

[jamesbrown]

So, will the retained profit be due CT? Then the overall liable figure might still be fairly similar to before.

You would only get a refund of CT on the amount that suffered CT that is now suffering PAYE plus NICs, in other words you should not get double-taxed on the same turnover with two mutually exclusive sets of taxes (even if that isn't HMRC's starting position).

[jamesbrown]

If I was to get a professional assessment from, say, David Kirk who charges £350+vat for a breakdown. Will that figure be 100% accurate?

One would hope so for that price, but I have no experience of David Kirk. FWIW, the main recommendation (from personal experience) I have in the general area of contractor tax (e.g., Chapters 8 through 10 of ITEPA) is Paul Mason:

https://uk.markel.com/tax/tax-expertise/paul-mason

I am confident that he understands the legislation and, hence, could produce a correct number for the deemed payment, given the correct input numbers, but I don't know whether he (or Markel) would provide that service.

[DealorNoDeal]

I contacted a couple of guys who used MSC structures before they were outlawed by the Apr 2007 legislation. In both cases:
1) unlike CBS, neither provider tried to carry on after Apr 2007; they discontinued their offering
2) all monies received from the agencies each month, after the provider deducted their fee, was immediately paid out as small salary + dividends

My guess is every arrangement was like (2), and if this is what the legislation was specifically designed to prohibit then they may have overlooked the possibility of retained profits. After all, no-one would want to leave retained profits in a company that they had little or no control over.

[Guy Incognito]

A quick question, how many of you have received your Regulation 80 determinations from Boox for 2018/19 and 2019/2020? I've sent repeated requests to Boox, but no response either way.

I have to appeal the NI demand in the coming two weeks and would like to combine it with the PAYE determinations.

I have not - I don't think it benefits you to chase HMRC, there is always a chance they forget (really!)

[dochkaian]

A quick question, how many of you have received your Regulation 80 determinations from Boox for 2018/19 and 2019/2020? I've sent repeated requests to Boox, but no response either way.

I have to appeal the NI demand in the coming two weeks and would like to combine it with the PAYE determinations.

All I've received by email today from Boox support my HMRC Regulation 80 determinations for 2018/19 and 2019/20 (dated 22/11/2022) along with NI letter also of the same date (I also received the NI letter by post direct from HMRC).

They also included their appeal letter including both the PAYE and NI HMRC determinations.

[Guy Incognito]

I think it's probably true that the total amount invoiced is the absolute worst case scenario (ignoring interest etc.).

If it is only "probably true" I'm interested to know how I could be expected to pay PAYE and NI on an amount higher than was invoiced?

[GregRickshaw]

I have not - I don't think it benefits you to chase HMRC, there is always a chance they forget (really!)

I would say be careful though as it's date issued not date delivered and there are a few horror stories on here of the demands (dated when issued) arriving 8 months later!

But yes HMRC do forget sometimes it's a tricky one to call.

[Fred Bloggs]

I contacted a couple of guys who used MSC structures before they were outlawed by the Apr 2007 legislation. In both cases:
1) unlike CBS, neither provider tried to carry on after Apr 2007; they discontinued their offering
2) all monies received from the agencies each month, after the provider deducted their fee, was immediately paid out as small salary + dividends

My guess is every arrangement was like (2), and if this is what the legislation was specifically designed to prohibit then they may have overlooked the possibility of retained profits. After all, no-one would want to leave retained profits in a company that they had little or no control over.

You would be correct. In all cases, composite companies were a complete pi55 take of incorporation. Solely a vehicle for paying less tax with no input from the contractor other than submitting a timesheet. No other purpose to them. Most of us were pleased that they were legislated against and I was surprised that it took as long as it did.

[jamesbrown]

If it is only "probably true" I'm interested to know how I could be expected to pay PAYE and NI on an amount higher than was invoiced?

It's harder to estimate the worst case scenario than provide a best guess. It isn't so much about the amount invoiced as what you include in the "ignoring interest etc." being ignored, such as the refund of CT and dividend tax and the cost to defending this. Note that the interest is going to be a non-trivial fraction of the total without a PoA if this lasts several years. I think a best guess is that the CT and dividend tax will be refunded and that it will probably reach tribunal in the next couple of years - I don't think HMRC will want to delay indefinitely - and the legislation seems to point to the deemed payment applying to the amount received by the worker that wasn't salary, so less than the total if there is retained profit. Also, I think HMRC will lose. So it isn't all doom.

[jofo]

jamesbrown thanks for your opinion on the legislation. What you've said does align to how I have been interpreting it and how I have been reading the examples in the ESM.

https://www.gov.uk/hmrc-internal-man...manual/esm3540
https://www.gov.uk/hmrc-internal-man...manual/esm3545

The way in which the deemed employment payment is calculated makes a huge difference to the overall liability, especially for those that did not extract all of the profits from their businesses each year. For me the difference in liability between the two interpretations (company revenue vs payments to worker) is way over 100k.

Using "payments from msc to worker" also means the expenses incurred in running the business, investing in assets etc, will be out of scope, so that avoids another kick in the teeth.

I am particularly interested in the deemed employment payment because I'm in the process of writing my dividends relief claim letter, as per section 61H. The way in which it is calculated has a direct impact on the level of relief that can be claimed.

61H(4) Relief under this section is given by setting the amount of the deemed employment payment against the relevant distribution so as to reduce the distribution.

Let say if i have issued a dividend distribution of £x and the company gets re-classed as an MSC, the £x now gets treated as a payment not treated as employment earnings. The £x is now considered to consist of part "Employers NI" and part "deemed employment payment".

As only the deemed employment payment part can be used to offset against the dividend already issued, it effectively means that you won't get back all of the dividend tax you've paid out. This is because you are now only being double taxed on the deemed employment payment, as the Employers NI is a company tax not a personal tax.

That being said, we should be able to claim relief by using the deemed employment payments associated with expense payments. As these haven't been already taxed as income, they can also be used to reduced the distribution and hence increase the dividend tax refund that you'll get.

So my conclusion is you'll only get all of your dividends tax refunded, if you've paid yourself sufficient expenses to cover the Employers NI gap.

The legislation does allow relief to be claimed across tax years. So if your total deemed employment payments for the year are greater than the dividends that you've issued, you can use the remaining balance to offset any future years dividends that get re-classed as earnings. This might be useful for people who say paid themselves more expenses one year than future years e.g. when covid hit and then we worked from home instead of traveling and staying away all the time.

The whole thing is a mess. It will be a close run thing when it gets to tribunal but I am pretty convinced that Boox will lose because the HMRC will show that a good portion of their clients just used the defaults in their accounting app, which automatically allocated a dividend and combined it into a single payment along with salary & expenses, and hence fall foul of:

61B (2) (c) influences or controls the way in which payments to the individual (or associates of the individual) are made,

Which then means the exemption clause unravels:

(5)Subsection (4) does not apply if the person or an associate of the person—

(a) does anything within subsection (2)(c) or (e)

Luckily, I didn't use any of the default behaviour and got my accountant to set the dividend target to zero in the app. All my dividends where issued manually by myself and hence I remained in full control of the way that payments were made. I have all the evidence to back this up, including the email correspondence with the accountant, so if they do lose on the above point, I believe I have a strong defence for my case.