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HMRC poised to collect tax from MSC providers

9th Apr 2019
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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 [2019] 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’s view

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”.

Earlier decisions

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.

MSC provider

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.

Replies (3)

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By cfield
10th Apr 2019 16:00

This is yet another example where the Government is not only failing to protect the public against "unscrupulous" firms but driving them into their clutches.

First there was the IR35 public sector shambles. Their draconian reforms more or less drove locums and other contractors into umbrella companies and some of these do not play by the rules. I know of at least a couple that still promote de facto contractor loans but are less than transparent about it. Guess who will be liable for the unpaid tax and NI when the schemes unravel and the umbrellas go into liquidation. The poor contractors.

The same goes for MSC providers. How are the public supposed to know that these firms are not the same as ordinary accountants for tax purposes? Who would imagine that they could be clobbered for unpaid taxes just for choosing the wrong "accountant", even if they are outside IR35?

Unscrupulous is not too strong a word, as these firms know full well they are almost certainly MSC providers but don't say anything to their clients about that. They will be on their toes the minute the brown stuff hits the fan, leaving the contractors to face the music.

The Government are basically complicit in all this, as they do nothing to warn people of the risks.

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Replying to cfield:
By Justin Bryant
10th Apr 2019 16:44

You've missed the point here. MSC clobbers the scheme operators; not their clients.

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Replying to Justin Bryant:
By cfield
10th Apr 2019 17:42

That would be true for a composite MSC but the MSC definition can also include one-man personal service companies. In that case, the contractor himself is at risk, either via his company or as a director via the debt transfer rules.

However, I admit there is a lot less chance of the 4th condition applying for one-man companies; i.e. that the MSC provider is "involved" with the company. Having said that, the 3rd activity defining involvement, i.e. influencing or controlling the way in which payments to the worker are made, could still upset the apple cart.

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