First MSC case finally heard!

    Its taken a while

    It might seem strange, but, the first appeals under the Managed Service Company (MSC) legislation have only been heard by the First-Tier Tax Tribunal (FTT) in the last few weeks, despite the legislation coming into force back in 2007!

    The Case

    The case in question is Christianuyi Limited and others v HMRC.  These are a group of appeals from medical practitioners, heard together before the FTT against determinations to Income Tax and NIC notices of decisions totalling some £160,000.

    The appeals dealt with the contractors use of Personal Service Companies to provide their services to third parties and whether these were caught by the Managed Service Company (MSC) rules through the involvement of Costelloe Business Services Ltd (CBS) as an MSC provider.  If that was the case then the determinations had been properly issued and the liability they created was properly due from the individual’s companies.

    The MSC rules

    The MSC legislation applies income tax and NIC to all of the fees paid to a contractor via the MSC.  For there to be an MSC it must be shown that:
    1. A company provides the services of an individual to a third party
    2. The individual receives payments that are directly linked to the fee for the service provided
    3. The individual receives more pay than they would had they been employed by the company
    4. There is an MSC provider and, 
    5. The MSC provider is involved with the company

    The Decision

    It was accepted that CBS were an MSC provider but it was denied that they were “involved” with the service companies.  The FTT rejected the appeal and confirmed the validity of the determinations raised and gave a detailed analysis of why they considered that CBS was involved in the service companies for the purposes of the MSC legislation.  That analysis makes disturbing reading as it highlights the lack of understanding by the contractors as to the risks they were undertaking and the nature of an MSC.  

    Specifically the FTT considered that CBS was “involved “as the company:
    • had some measure of control over the PSC bank accounts which influenced payments to the contractors and the PSC’s finances, 
    • benefitted financially from the provision of the contractors services.

    Further hearings to come

    It appears that there is a second case pending which if successful will allow HMRC to apply the debt transfer rules and pass some or all of the debt to CBS.  This is clearly the thin end of the wedge as the judges in the case said that they:

    “……….understand that there are a number of other appeals concerning this legislation which are pending before the First-tier Tribunal.”

    Lessons need to be learned

    Contractors who are involved in the use of PSC’s where the company is set up by their agency or in part is run by anyone other than the contractor themselves should ask one important question: “How can I be sure that this isn’t an MSC arrangement?”  We are hearing stories from concerned contractors who have entered into arrangements with intermediaries which HMRC are now attacking as they believe them to be caught by the MSC rules.  In many cases the contractors were not warned about the nature of the arrangements or the potential risks when they signed up with the intermediary.  For many contractors this decision comes too late to allow them to ask about the risks in their arrangements as the damage has already been done.

    Going forwards, with the increase in the use of PSC arrangements by labour provision businesses this is an area which should be carefully considered by both agencies and contractors.  The message is clear if in doubt seek an expert opinion.