Debt Transfer

In the 2007 budget, the Government introduced new legislation relating to Managed Service Companies (MSC’s) - found within Chapter 9, Part 2 Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This legislation looks to re-classify the employment status of those contractors and the self-employed who provide their services through an intermediate provider. The income of the individual will be subject to National Insurance and income tax deductions on their gross earnings - in effect treating them as employees for tax purposes.

The legislation also contains transfer of debt provisions (Section 688A, Part 11 ITEPA) which allows for the transfer of PAYE and NIC debts of an MSC to be transferred to third parties if HMRC cannot recover the debt directly from the MSC itself.

Debts may be transferred to an MSC’s director, the MSC provider, or any other third party which has directly or indirectly encouraged, facilitated or otherwise been actively involved in the provision of the services of the individual through the MSC.

Thus, a recruitment agency which dictates that any individual operating a PSC must operate through a preferred MSC provider may become liable for unpaid PAYE and NIC debts due to the fact that they have ‘encouraged, facilitated or been actively involved in the provision of the services of the individual through an MSC. It is important that employment businesses and recruitment agencies do not force or steer individuals down an MSC route.