By Alex Turner and Andy McNicoll
Experts have warned agency social workers to review their tax arrangements in light of a landmark tribunal ruling described as a “cracking victory” by HMRC.
The ruling, which was handed down in April, found Costelloe Business Services, a firm that set up and ran limited companies for hundreds of agency social workers and more than 200 health professionals, fell foul of strict tax rules in the way it worked (see box below).
Costelloe was found to be caught by ‘Managed Service Company’ (MSC) legislation introduced in 2007, which meant practitioners’ earnings should have been subject to full PAYE tax charges.
HMRC expects to recover up to £9m from Costelloe’s operation. Yesterday, Community Care revealed social workers have been hit by retrospective tax bills of up to £45,000 each as HMRC has used legal powers to claw back unpaid taxes from Costelloe-run companies by transferring debts on to individual practitioners who were their directors.
Tax consultants told Community Care HMRC is targeting other companies that operate similarly to Costelloe Business Services. They recommended social workers set up as limited companies should review their arrangements in light of the ruling.
Kye Burchmore, a director at Assured Tax Consulting, said: “Costelloe is not a one off. There are many companies that operate in a similar way although they will all say they operate slightly differently or don’t get quite as involved. But in my opinion, it is a slippery slope and while it may be true of some, HMRC are currently targeting others under this legislation and I believe other companies will also fall foul of this law.
“For people looking at setting up limited companies, or being pushed in that direction, the main thing is to engage a genuine accountancy practice to assist you in this process – which will maybe provide you with a little advice about structuring your pay and dividends and do your accounts, but nothing more.
“There is an exemption that means if a company provides legal or accountancy services in a professional capacity, they will not fall within the [MSC] rules. This was not, rather surprisingly, argued in the Costelloe case but even if it had been, I feel the judge would have quickly said they went far beyond just providing accountancy services.”
David Kirk is a tax consultant who specialises in employment status, PAYE and National Insurance. Asked what advice he would give to social workers considering setting up as a limited company in light of the Costelloe ruling, Kirk said: “By and large – don’t. I’d look at each proposition on its merits, but how many social workers have the skills and competence to run a company? They are not exactly the same sort of skills one requires for doing social work.
“You can do it if you take advice from accountants, but it has to be that: advice. If you let accountants, or providers, or whatever they call themselves, run your company for you, then you may well be in Managed Service Company territory and you are unlikely to know enough about how the provider works to be able to tell – it is the provider’s behaviour that really determines this, not yours.
“Even if you think you can, you’re not out of the woods. You still have to consider the intermediaries laws, commonly known as IR35. These basically ask, ‘If your company and the agency weren’t there, would you be an employee of the local council for whom you are working?’ In other words, it looks at the underlying reality. I suspect that there are few social workers who would have the knowledge and confidence to answer ‘no’ to that.”
Costelloe Business Services’ now defunct website boasted that the firm’s “commitment, experience and attention to detail will ensure that your company and its accounts are compliant with Companies House and HMRC regulations”.
Crawford Temple, chief operating officer at Professional Passport – a company specialising in compliance in the contractor sector – said practitioners should be careful to seek further advice on such assurances.
He said: “The key thing for any contractor is that they should get independent third party validation of a provider’s compliance if they are being recommended to use anyone. Because the issue is every single provider maintains they are compliant, the reality is some are not.
“The common line is ‘If something looks too good to be true, it probably is.’”
How Costelloe fell foul of tax rules
Q&A with David Kirk, tax consultant
CC: How did Costelloe break the rules?
DK: Costelloe was what is known as a ‘managed service company provider’ – a company that has a business of promoting or facilitating the use of other companies, to provide the services of individuals.
It then got ‘involved’ with the practitioners’ companies. ‘Involved’ is a word with a special legal meaning here, and Costelloe was ‘involved’ in three ways.
First, it gained financially on an ongoing basis from the provision of the client individuals’ services, which they did by not charging when the clients were not working. Second, it controlled the client companies’ finances. And third, it controlled the way in which the client companies made payments to the client individuals.
Where you have this combination – a managed service company provider getting ‘involved’ with a company – that company is a managed service company and has to operate PAYE and National Insurance, including employer’s NI, on all payments made to the person doing the work. In essence, Costelloe was running those companies. The spring 2016 tribunal was not swayed by what was supposed to happen – they examined what actually did.
CC: Why is HMRC chasing the directors of individual companies in the first instance?
DK: It’s the managed service companies that are responsible for operating PAYE, and so are in the first instance responsible for paying any PAYE debts. However, HMRC has found that when they look at this sort of setup, these companies very rarely have any money left in them.
So a law was introduced saying that where a managed service company was unable to pay its PAYE debts, they could issue a notice and transfer any PAYE debts to a number of other parties, including the company’s directors. In this case, this means the social workers and other professionals.
CC: Why do you think HMRC appear to have been helpful in some cases, whereas other social workers have told us they’ve been pursued for the full amount?
DK: HMRC’s job is to collect tax that’s lawfully due, and its officers are all too used to hearing excuses – so can be a bit cynical about this. It is always best to approach them if you have difficulty paying, so as to get time to do so. HMRC will need a full statement of your assets, liabilities, income and outgoings, but provided officers think they’re being told the truth, and you can settle on a reasonable time to make payment (usually up to two years but sometimes longer), they generally agree to this.
CC: Do you expect action to follow on other companies that operated similarly to Costelloe?
DK: Absolutely: in private HMRC have said so – there are apparently a number of other cases on the way to the tax tribunal. The providers will fight these cases all the way to the tax tribunal because they know that it means bankruptcy for their directors if they don’t.
Costelloe does seem to have been an extreme case – so far from being compliant that HMRC practically had a walkover in the tribunal. Other cases may not be so easy to determine. The tax tribunal is a part of the court system, not a part of HMRC, and its judges are not only independent but very robust.