Rebecca Seeley Harris explains why HMRC’s win in the first case concerning the managed service company legislation is a worrying development for contractors.
What is the MSC law?
The managed service company (MSC) legislation was first enacted in 2007, but a more accurate title for this law would now be: the ‘managed personal service company’ legislation.
Originally, the legislation was designed to close down the composite managed service companies, which it did virtually overnight. Now HMRC is about to realise the full potential of the MSC rules by exercising the transfer of debt provisions which, as the name suggests, transfers the tax debt to ‘another’ if it cannot be recovered from the individual.
This use of the transfer of debt rules is only possible because HMRC has won the first case brought under the MSC legislation at the Court of Appeal Christianuyi & Others v. HMRC  EWCA Civ 474
Facts of the case
The appellants in Christianuyi & Others v. HMRC are all companies that provide services of a particular individual and in each case, that person is the sole director and majority shareholder of the company. The appellants contract with the end client who wants to engage the services of the individual. So far, those companies are looking like personal service companies but then enter Costelloe.
Costelloe Business Services Ltd set up all the appellant companies and provided additional services. The issue in front of the court was whether the appellants were managed service companies (MSCs) and, critically, whether Costelloe was a managed service company provider. If they were MSCs, there is a significant effect on the tax treatment of the payments that are made by the appellant companies to the individuals who own them.
HMRC considered that the MSC legislation applied and, as a result, issued a determination demanding tax to each individual company for the tax years 2007/2008 and 2009/2010. Christianuyi Ltd provided the services of a forensic medical examiner and had determinations totalling £43,818.74 for income tax and £27,923.67 for national insurance. The Court of Appeal was unanimous in agreeing with the FTT and upper tribunal that Costelloe was undoubtedly an MSC provider and the appellants were undoubtedly MSCs.
Who pays the tax?
The objective of the legislation is to tax the MSC as if they were a deemed employee. If HMRC cannot recover from the individual, it can transfer the debt to a third party and that could be the agency or the client.
Unlike IR35, this MSC legislation does not use the employment status test as it does not require the distinction between employed or self-employed. HMRC only needs to prove that there is a managed service company and, in addition, a managed service company provider who is “involved”.
The upper tribunal in Christianuyi concluded that there was a perfectly straightforward, two-stage test, for determining whether a company is or is not an MSC provider:
- Does the putative MSC provider promote or facilitate the use of a company?
- If so, does the company provide the services of individuals?
That perfectly straightforward test demonstrates how wide the legislation was drafted, as the Court of Appeal accepted it. This was based on the evidence of the Government’s intention from the responses to its consultation in 2007.
The MSC legislation is not aimed at the legal or accountancy professions but at the MSC providers who are involved with the company.
The FTT case concerning Christianuyi looked at three tests of how the MSC provider would be “involved with the company”:
- 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.
In the first instance, the tax determinations are issued to the MSC, who no doubt thought at the time that the MSC provider was a perfectly legitimate service.
In this case, the total determinations from all five companies for tax and national insurance contributions is in the region of £160,000. If HMRC cannot recover from the individual MSCs they will pursue the next third party in the chain.
In recent weeks, contractors have been receiving managed service company compliance letters from HMRC, and that can’t be a coincidence. What is even more worrying is that although the focus has been on tax protection insurance for IR35, it is possible that the MSC legislation wouldn’t be covered under such a policy.
About Rebecca Seeley Harris
Rebecca is a specialist in ‘employment status’ and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years but, has recently joined PKF Francis Clark as Director of Employment Status. She will be heading up a team covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35, s.44, CIS and any issues affecting the self-employed and personal service companies.
Rebecca was also seconded to the Office of Tax Simplification (an independent body of HM Treasury) as a Senior Policy Adviser to advise the government on employment and tax status. She was part of a small team of experts who drafted the Employment Status Review 2015, she then continued to advise on the review of Small Company Taxation leading on the taxation of nano companies and the self-employed. As a result of that review, Rebecca developed the concept of SEPA, providing a vehicle to the self-employed to be able to protect the family home. Rebecca was also a representative on the Cross Government Working Group on Employment Status and has most recently published the review into the taxation of the Gig Economy.
To call Rebecca: 01392 407936 or email [email protected]