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MSCs under attack as test case lost

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9th May 2016
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HMRC has successfully applied the MSC rules for the first time.

The Managed Serviced Company (MSC) rules were introduced from 6 April 2007 to crack down on businesses that ignored the IR35 rules on an industrial scale. Those businesses provided tens of thousands of workers such as cleaners, drivers and security guards, with packaged service companies – defined in FA 2007, Sch3 as MSCs.

The MSC provider would typically make extensive use of the reliefs for employee travel expenses (ITEPA 2003, ss 338-339) to reduce the tax and NIC of the workers. Those reliefs have been curtailed from 6 April 2016 where the worker is subject to supervision, direction or control in their job (as described by Kye Burchmore).

HMRC has found it almost impossible to enforce the IR35 rules, so it decided to write new rules to impose PAYE and NIC on all of the worker’s income, including dividends, which he receives from an MSC. What’s more if the MSC does not pay over the tax and NIC deemed to be due on the worker’s income, that tax debt can be transferred to the MSC provider and to then on to the directors of the MSC provider.

Such is the complexity of the MSC legislation that it has taken nine years for a test case on these rules to come before a tax tribunal. The Christianuyi Ltd case names five individual personal companies (the MSCs), but the organisation really on trial was the MSC provider - a company called Costelloe Business Services Ltd (CBS).

For the MSC rules to bite there has to be both an MSC provider and that provider must be “involved” with the MSCs. Accountants and lawyers should be exempt from being defined as an MSC provider if they are only providing services in a professional capacity.

What is surprising about this case is that CBS admitted it was an MSC provider, but denied it was “involved” with the MSC companies. There are five tests of “involvement” within the MSC rules, and only one of those tests has to be met for the involvement condition to stick. CBS did not claim the exemption for accounting and legal services.

Matt Boddington of Chartergates Legal Services, explained that once a company has conceded that it is an MSC provider it will be virtually impossible to avoid the “involvement” test. In this case HMRC accused CBS of three forms of involvement:

  • benefiting financially whenever the worker actually provided their services;
  • influencing or controlling how the worker received their payment; or
  • influencing or controlling the worker’s company finances or other activities.

The tribunal decided that all three forms of involvement were present, so CBS was involved with the MSCs, and the MSC rules took effect.

The mistakes made by CBS included:

  • using its own bank account for money due to the MSCs and keeping half the interest that arose on that account;
  • admitting that board minutes drawn up for each MSC were false; and
  • charging each MSC fees but only when the worker was providing services.

Boddington notes that CBS advised around 1,000 service companies, although only five were the subject of this test case. Extrapolating from the tax due from the five named companies (£160,000), the total tax at stake could be around £30m.

There is a parallel tax case in progress, which has not been reported yet, in which HMRC is attempting to collect the tax debt from CBS or its directors. However, that debt net could be cast wider to catch anyone who “encouraged” or has been “actively involved” in a worker going into an MSC. Boddington notes that any agency who has referred workers to CBS should read this case judgment very carefully.

MSCs are still widely used in many sectors, particularly to provide the personal services of delivery drivers. The Road Hauliers Association (RHA) is actively advising its members to be paid under PAYE if they are not the operator (owner) of the vehicle they are driving. HMRC has backed the RHA’s stance on this issue in the April edition of Agent Update.

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Replies (11)

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By Mikolaj
11th May 2016 12:34

I have 30 or so ex-MSC clients (mainly drivers) although some now from traffic management. The MSC providers such as:
Think Accounting Ltd (ceased trading) then seamlessly moved to New Wave Accounting Ltd (ceased trading) then and again moved seamlessly to Igloo Accounting (ceased trading) etc.
Nova Contracting Ltd (in its many guises) et al.

It is a fact that many foreign nationals had no idea they were a director (no inkling as to a directors responsibilities) and in many cases had been registered for vat without their knowledge (they never saw any of the flat rate vat benefits).
The reality that such fraud and money laundering is allowed in the first place is preposterous, but despite mine own as well as I'm sure many others' protestations HMRC and Companies House seem toothless and/or unwilling to prevent such activities. The use by contracting companies of MSC's and umbrella companies is a shameful exploitation of workers. The umbrella employee MSC director believe they are benefiting, but they will suffer when HMRC comes knocking for back taxes, which they are properly entitled to do.
There is a disgusting stench about the activities of MSC and umbrella company providers and this practice should be explicitly outlawed, that is my humble opinion!

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Replying to Mikolaj:
By DotasScandalDotOrg
11th May 2016 13:48

Mikolaj wrote:

The reality that such fraud and money laundering is allowed in the first place is preposterous, but despite mine own as well as I'm sure many others' protestations HMRC and Companies House seem toothless and/or unwilling to prevent such activities

Mikolaj, don't be surprised. It's the same as with the so-called "Contractor Schemes"... HMRC are martyring tens of thousands of end-users, while the promoters get off scot free and continue peddling the exact same stuff in the open. They always go for the average Joe, the so-called "soft target", NEVER for the providers of such "solutions". It's outrageous but sadly that's how things work here in the UK.

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By richard.snape
11th May 2016 13:10

If 5 test cases owed £160,000 (about £30,000 each), wouldn't 1,000 service companies mean the total tax at stake is around £30m not £3m as stated.

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Replying to richard.snape:
Head of woman
By Rebecca Cave
12th May 2016 08:42

yes £30m I'll edit the article

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By johnjenkins
11th May 2016 17:00

As these MSC's have no dosh then liquidations abundant will be the order of the day.

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Replying to johnjenkins:
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By tonyglasbey
11th May 2016 20:56

Actually, John, HMRC are empowered by the legislation to go after the MSC's officers (directors and secretary) if the company can't pay. Liquidating will be of no avail.

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Replying to tonyglasbey:
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By johnjenkins
12th May 2016 08:21

I know where you're coming from Tony but if you suddenly create a tax bill and there is no money to pay it from any source then really it's pointless.

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By richard.snape
11th May 2016 18:42

Hopefully the following will apply then. "if the MSC does not pay over the tax and NIC deemed to be due on the worker’s income, that tax debt can be transferred to the MSC provider and to then on to the directors of the MSC provider."

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By Scarfy
24th May 2016 13:23

New Wave Accounting was only set-up due to HMRC sniffing around Think Accounting and Igloo Accounting was only set-up again, due to HMRC sniffing around New Wave. The director and his 'advisers' knew what they were doing and knew that they were an MSCP.
HMRC have been looking into the directors for years but nothing seems to have been done even though they meet all 3 forms of involvement. They are nothing more then crooks yet HMRC still allow them to get up albeit under a different guise and yet go on to 'fleece' more drivers that want to earn an honest living. They even lied to their employees about the company going into liquidation and yet told their clients that 'he - the director' was retiring due to ill health. HMRC have refused to help the employees with monies owed and the director kicked the employees out and refused to pay them any monies owed. The 'Ill Health' cited in the letters to clients was plastic surgery paid for using monies belonging to the clients.
HMRC also need to target the agencies that insist their drivers sign up with the MSCP as quite often their are back-handers going on - certainly the case with some agencies that used Igloo Accounting.
HMRC - please do not allow these companies to keep getting away with this kind of fraud/money laundering.

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By AndrewV12
16th Nov 2016 16:00

HMRC found a very soft opponent in CBS, hopefully later on they will come across an organised organisation and come un-stuck.

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Replying to AndrewV12:
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By johnjenkins
16th Nov 2016 16:43

Andrew you definitely are having a day off (not off day).

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