New legislation widens the liability trap for lost PAYE.

The Government is rushing in legislation to tackle the taxation of managed service companies with effect from 6 April 2007. We consider the recently announced provisions designed to force “third parties” to pay an MSC’s tax and social security liability.

On 8 February 2007, the Government published draft legislation dealing with the transfer of an MSC’s PAYE and NICs debt. The Government’s view is that HMRC face considerable difficulty in collecting PAYE and NICs due from MSCs. Where a liability has been established, they say that the debt often cannot be collected from an MSC because MSCs generally have no tangible assets making it easy for them to be wound up or simply to cease trading and for workers to move to a new MSC.

Third party liabilities for MSC debts

To tackle this, certain third parties will be made liable for the PAYE debts of MSCs where the MSC does not pay. These will include any parties clearly and directly involved with the MSC (scheme providers and directors, office holders or associates of the MSC).

For other third parties, the scope of the provision is limited so that the legislation is not intended to include anyone who did not know, or could not reasonably be expected to know, that they were dealing with an MSC. These other third parties will only have the debt transferred to them if the debt cannot be collected from the scheme provider or the director, office holder or associate of the MSC.

Liability tests for end clients

The Government has explicitly referred to employment agencies and end clients as being included in the category of “third parties”. The test to be applied is whether the person has “encouraged, facilitated or otherwise been involved in the provision by the MSC of the services of the relevant individual”.

This seems to suggest that liability does not depend on the knowledge of the end client and a liability might arise even if the end client is unaware of the arrangements in place. However, the Government has indicated that the debts cannot be transferred to anyone who has simply received the services of a worker operating through an MSC.

However, the Government has indicated that an end client who told workers that they had no choice but to incorporate through an MSC or offered higher rates of pay to move to an MSC, would be within the scope of the legislation. Conversely, an end client who used workers from an employment agency, without knowing whether the workers were operating through companies or not, would not fall within scope.

What should you do?
If you are an end client, it is important to first review your arrangements with workers provided through agencies and other like bodies. You should ensure that the appropriate indemnities are included in any contracts between you and the agency or other entity providing workers.

These indemnities should include not only PAYE indemnities (should HMRC deem you to fall within the category of liable “third parties”) but also against any claims from workers that they have acquired employment rights whilst working for you.
You should also be aware that the costs of these workers are likely to increase as many will seek to pass on the additional PAYE costs to the end client.


It is not yet clear what level of end client knowledge will be required to give rise to a liability for the MSC’s PAYE liabilities. These provisions are coming into force on 6 April 2007 and it is hoped that clarifying guidance will be issued very shortly.