A recent case has highlighted the impact of the MSC legislation on the contracting industry. How can you ensure that you are not involved with an MSC provider – who is effectively controlling your limited company?
What is the Managed Service Company Legislation?
The MSC legislation (Chapter 9 ITEPA 2003) was introduced in April 2007 to counteract the growing number of composite companies which existed at the time. Typically ten to twenty contractor shareholders would work via a single company, operated by a scheme provider, which would take care of all invoicing and accounting tasks. The provider might even control its users’ bank accounts. Participants would benefit from the favourable tax treatment of their income, despite working in the same manner as ’employees’.
If you work via a limited company to provide your personal services, but the running of the company is controlled by a third-party provider, then the rules may well apply – even if you are operating via your own personal service company.
Like IR35, if the MSC rules are deemed to apply to your company, then the company’s income will be re-classified as standard employment income, subject to income tax and National Insurance Contributions.
Recent MSC case – Costelloe Business Services Ltd
A recent case, which HMRC won at the Court of Appeal – Christianuyi & Others v. HMRC – has significantly raised the profile of the MSC legislation, which has barely received a mention on contractor news sites over the past decade.
In the case, the appellants were all limited company contractors – operating their own personal service companies – not as members of a composite company.
The contractors’ companies were all set up by a third party – Costelloe Business Services Ltd (CBS) – which also provided a variety of services (including accountancy) for the appellants.
Due to the nature of the relationship between the parties, CBS was found to be an MSC Provider by the Court of Appeal. The five appellant companies were deemed to owe around £160,000 between them in tax liabilities.
The appellants each negotiated their own contracts (including payment terms and contract rates) with their end-clients – sometimes via a recruiter – but CBS had no control or influence over these negotiations.
However, CBS was found to be a Managed Service Company Provider by virtue of the amount of control and influence it had over the running of its customers’ company affairs.
The contractors all worked via CBS’s ‘Gold Business Service’, which was standardised, and had the following features:
- Costelloe set up each limited company.
- Each company used CBS’s registered office address
- A group company was appointed as ‘company secretary’ for each contractor company.
- Payments for work done were paid into special bank accounts, set up and controlled by CBS.
- CBS kept some of the interest received on clients’ revenues.
- CBS originally charged a percentage of the invoice value for its fees, although this was later changed to a fixed fee.
- If no work was done, clients would not be charged for these periods.
- CBS deducted fees and tax liabilities from these funds, and the balance would then be paid to contractors’ personal bank accounts in the form of minimal salary and dividends.
The Court of Appeal upheld the decisions of the First Tier and Upper Tier Tribunals – that CBS was an MSC Provider, as the company:
a) benefited financially on an ongoing basis from the provision of the services of the individuals,
b) it influenced or controlled the way in which payments to the individuals were made by the Appellants.
c) it influenced or controlled the Appellants’ finances or any of its activities (e.g. directly operating bank accounts)
This decision shows how important is it for limited company contractors to be able to show that they are operating in business on their own account. If you play no part in the running of your company administration, your accountant tells you how to remunerate yourself, and/or even controls your bank account, amongst other things, this may be cause for concern.
Additionally, as a result of this ruling, HMRC can now use of transfer of debt rules to collect any outstanding tax from companies further down the chain, if the contractor is unable to pay.
- You can read the judgement for the Christianuyi Ltd case here.
- Read more about this case, and its implications, in this article on AccountingWeb.
- HMRC also discusses the case in this recent Spotlight publication.
Recent developments – MSC letters
A leading tax consultancy recently reported that some of its contractor clients had received letters from HMRC’s Counter Avoidance department, relating to the MSC legislation – in light of the CBS ruling.
We asked Seb Maley from Qdos what contractors need to be aware of when it comes to the MSC rules, and how this recent case has re-stoked interest in rules which have, until recently, remained below the radar.
The Christianuyi Ltd case
“It could be said that the recent Christianuyi Ltd case will give HMRC the confidence to increase their activity in respect of the MSC legislation. The case failed to set precedents in a number of grey areas and has left the legislation open for HMRC to interpret. Judging by the letters HMRC is sending, it looks like they are now increasing compliance activity.
Who is liable if the MSC legislation is deemed to apply?
“The legislation itself focuses on the business practices of the service provider (usually the accountant) for the contractor’s limited company. However, the contractor will be held liable should HMRC find that the MSC rules apply. Assuming the contractor can’t afford to pay this liability, the debt can be passed down the supply chain.
What are these compliance letters asking for?
“The letters come from the Revenue’s Counter Avoidance department and request various items of information, including contracts and bank statements. They also offer a meeting and come with a warning that not providing the requested documentation could result in a penalty.
What should you do if you receive a letter?
“It’s vital that any correspondence with HMRC is handled carefully. This is a complex area of tax law and the legislation is purposefully open and subjective. Should you receive a letter or are concerned about your situation, we urge you to speak to a tax expert.”