Managing director Chartergates
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HMRC set to collect £6m after MSC win

30th Jan 2018
Managing director Chartergates
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A long-awaited test case concerning the Managed Service Company rules has been won by HMRC. This result will allow HMRC to collect an estimated £6m in back taxes.   

Upper Tribunal

In May 2016 Rebecca Cave reported on the very first judgment of the tax tribunal relating to the Managed Service Companies (MSC) legislation. That first MSC case has now found its way into the upper tier tax tribunal (UTT) on appeal, and the UTT has now issued a judgment dismissing the appeal.


The MSC legislation was introduced in April 2007, as a reaction to the perceived mass marketing of personal service companies (in particular, so-called composite companies).

The MSC rules work by asking whether there is an ‘MSC provider’ – a business promoting or facilitating the use of companies – and then asking whether that MSC provider is ‘involved’ with a given service company.

If there is ‘involvement’ then the MSC rules bite and the service company is an MSC, resulting in PAYE becoming due on all payments to the worker (including dividend payments). A discussion of the facts to the original case can be found in the Chartergates newsletter of 29 April 2016.

First tier judgment

That first MSC case involved five service companies who HMRC had alleged were MSCs, due to the fact that an MSC provider, Costelloe Business Services Ltd (CBS), was ‘involved’ with them.  A standout feature of the original hearing was that the appellant companies all accepted that CBS was an MSC provider, so the case purely concerned whether or not CBS was ‘involved’ with the service companies. The original tribunal held that CBS was involved with the service companies and their appeals all failed.

To provide a context, CBS advised around 1000 clients and based on extrapolation of the tax due from the five cases heard. We estimate the overall liability in the CBS cases to amount to around £6m.

Unqualified accountant trap

The MSC legislation includes an exception which states that those who are merely providing legal and accounting services in a professional capacity cannot be MSC providers.  HMRC claim that this exemption is only available to those who are professionally qualified and registered with a regulatory body (I wonder why the legislation does not simply say this).

On the face of it at least, every accountant providing accountancy services to service companies is ‘facilitating’ the use of those companies, and a large proportion of these accountants are either not professionally qualified, unregulated, or both, which – according to HMRC’s interpretation – would make them MSC providers as defined.

As there are five possible ways in which an MSC provider can be ‘involved’ with a service company, and they are defined very widely to encompass even exerting influence over the way in which payments are made to the individual (which surely any decent accountant providing sound tax advice should be doing) then the ramifications of this expansive interpretation are extremely worrying.

Debt transfer rules

The MSC legislation also includes corporate and personal debt transfer provisions which are wider than any other piece of tax legislation. These impose potential tax liabilities on the MSC itself, its directors, the MSC provider and its directors, or on any other person who has even indirectly encouraged the use of the MSC. There is a recipe for a catastrophic and unexpected tax liability to hit the accountancy profession and those working within it.

Was CBS a MSC provider?

The UTT allowed the appellants to resurrect the argument that CBS was not in fact an MSC provider after all – the opposite of the position it conceded in the FTT case.

At the UTT the appellants argued that an MSC provider must be promoting or facilitating the services provided by the service companies rather than just promoting the use of companies generally. This argument was roundly rejected by the UTT. Perhaps surprisingly (and unhelpful from a wider perspective) no argument was put forward that the ‘legal and accountancy’ exemption might apply, despite the fact that CBS had employed a qualified accountant.

Clarification required

Unfortunately, this UTT judgment leaves us none the wiser in terms of the judicial interpretation of the extent of the MSC rules. There is some commentary in the judgment regarding the potential for all sorts of ‘facilitators’ of service companies to be inadvertently swept up by the onerous MSC rules, such as payroll providers, but no conclusion on exactly which service providers would be caught.

Given the potentially enormous tax liabilities resulting from the MSC rules, and the fact that there is personal liability under the debt transfer legislation, this is a highly unsatisfactory position of uncertainty.

Appeals against factual findings such as this one are difficult to sustain. The service companies were always facing an uphill struggle. However, we cannot help but feel that an opportunity for some much needed clarification has again slipped through the judicial grasp.

*This article was edited 31 Jan to correct the date of the MSC legislation an edited on 1 Feb to correct the HMRC arguement at UTT*

Replies (10)

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By Justin Bryant
31st Jan 2018 11:25

These sort of tax geared penalties for (otherwise) law abiding tax advisors should not be permitted in a civilised democratic society; since you are then arguably potentially exposed to more serious penalties than proper criminals like muggers etc., which cannot be right. They also apply since 1.1.17 to offshore enablers where the relevant country is not CRS/EU, so if you have a non-compliant US taxpayer client that could basically ruin you if you're not careful.

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Replying to Justin Bryant:
By Nick Graves
31st Jan 2018 11:23

Justin Bryant wrote:

These sort of tax geared penalties for (otherwise) law abiding tax advisors should not be permitted in a civilised democratic society; since you are then arguably potentially exposed to more serious penalties than proper criminals like muggers etc., which cannot be right. They also apply since 1.1.17 to offshore enablers where the relevant country is not CRS/EU, so if you have a non-compliant US taxpayer that could basically ruin you if you're not careful.

Why? Muggers are invariably opportunity for State Rape.

Matt is correct though - this bizarre piece of obfuscation basically removes any semblance of justice or proportionality from the outcome. As bad as the Gov't Money Laundering situation can be for those not adjudged as wrongdoing.

Prepare to be nationalised....

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By LynneG
31st Jan 2018 10:42

Just a minor point - MSC legislation was 2007, not 2017

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Replying to LynneG:
Tom Herbert
By Tom Herbert
31st Jan 2018 11:24

Thanks LynneG - that's now been amended.

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31st Jan 2018 11:01

We must salute HMRC and give them our unremitting support at a time of crisis for our welfare state institutions.
Responsible capitalism probity and integrity of agents are essential as we approach a new social democratic governance.

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By Paul Soper
31st Jan 2018 11:47

Despite the victory for HMRC I wonder how keen HMRC will be to press home the point with the other 1,000 or so companies 'promoted' by Costelloe Business Services?HMRC seem prefer the nonsense of the alteration to IR35 to encompass, first of all, the public sector (all of the five 5 companies here were within the NHS and so the public sector) and now they want to extend it to the private sector. This demonstrates that HMRC have the powers to deal with service company abuses already but don't have the will or the person-power to pursue it...

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By Mr J Andrews
31st Jan 2018 12:40

£6million !
Amazoning amount of back tax.

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By martinhayward
31st Jan 2018 12:56

Am I missing something here? In my 30 year as a chartered accountant HMRC has never recognised the difference between qualified and unqualified. Until now when it suits them !

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By cfield
04th Feb 2018 16:15

Sounds to me like HMRC have got their own dictionary out again and are interpreting words in a way that suits them.

I don't see why "providing legal and accountancy services in a professional capacity" means you have to be qualified. What is the meaning of the word professional? According to the OED, there are 2 definitions of this word when, as here, it is used as an adjective.

1 Relating to or belonging to a profession.

The accountancy profession is much older than the bodies that now regulate it. In fact, the first name ever written down in history probably belonged not to a king, emperor, god, poet, warrior, high priest or philosopher, but to an accountant. Writing was invented to keep tax records. Hence, I don't see why you have to be a member of an accountancy body to belong to that profession.

2 Engaged in a specified activity as one's main paid occupation rather than as an amateur.

Even the bucket shops do accounts for a living, not as a hobby, so that definition doesn't work for HMRC either, even if the work itself is amateurish. Might exclude those in spare time practice though.

HMRC may have been on safer ground if the word professional had been used in the legislation as a noun. The OED definition is "a person engaged or qualified in a profession".

Engaged or qualified. So you don't have to be qualified. To be engaged in a profession, I suppose you just need to be doing work typical of that profession.

We've seen all this before from HMRC, twisting and bending the English language to suit their own purposes.
Reasonable excuse is the main one that springs to mind of course, although there are many others.

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04th Feb 2018 19:15

We must salute HMRC as we need at least £ tax per annum to welfare our police our medics our carers etc.
Whenever I have been asked to comply on behalf of a dodgy unscrupulous ' nick ye granny's purse ' client i have acted swiftly intelligently with unremitting diligence and probity.
In some cases i have made pleadings for a waiver of financial penalties and penalties have not been raised.
When I have asked for a waiver on back tax interest charges they have said ' don't push ye luck sunshine '
C est la vie.

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