The taxman has warned service companies that just because they are offshore does not mean they are exempt from legislation designed to crack down on them.

As part of HM Revenue & Customs’ ongoing monitoring of new managed service company tax legislation, which intends to stop workers within such businesses dodging their tax and NICs liabilities, it has found a number of offshore providers claiming to be exempt from the rules.

Offshore businesses providing the services of workers to UK clients are claiming their arrangements fall outside of the tax rules.

HMRC says that claiming MSC tax rules do not apply to companies registered overseas is ‘misleading’. Where the worker is resident in the UK and the work is carried out in the UK, the intermediary is treated as having a place of business in the UK.

However, HMRC does not say that the offshore arrangements are necessarily dodging tax by being overseas, but relying on being abroad is not enough to be exempt.
Anne Redston, chair of the personal tax committe at the CIoT, agreed with the taxman. She said: ‘If they say that because they are offshore they are not caught [under tax rules], they’re wrong.

‘Even if the administration [is abroad] you still have to pay tax.’

The taxman also notes that the marketing of service providers on the internet, claiming to save workers’ NICs, suggests those providers fall under the tax rules.
It warns that where HMRC cannot recover tax and NICs from the workers or service providers, it will use its powers to transfer the debt.

The debt can be transferred to any person who has directly or indirectly encouraged or been involved in the MSC’s provision of services.

HMRC admits that this rule has led to some recruitment businesses refusing to deal with service providers.

While recruitment companies should mitigate their exposure to the transfer of debt provisions, HMRC says the legislation was not introduced to stop those ‘genuinely in business’ providing their services through service companies. Guidance has been issued to recruitment businesses to help them take a ‘balanced view’ of the risk they face under the debt transfer provisions.

Putting together the legislation has proved a pain for the taxman, which has struggled to find a way to create rules to define exactly what is a managed service company provider, and make sure innocent parties are not caught within the rules.