Managed Service Companies – The Christianuyi Case continues
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
2 July 2019
The latest decision in the case of Christianuyi Ltd and other companies v Revenue and Customs Commissioners [2019] EWCA Civ 474 was released by the Court of Appeal in March 2019. Justine Riccomini takes us through the maze.
Background
This latest judgement follows previous decisions made in the First Tier Tribunal (FTT) in 2016 and the Upper Tribunal (UT) in January 2018. The case is worth following because it is the first case to have come to court concerning the legislation on Managed Service Companies.
The decisions made revealed the Tribunal’s thinking for the first time on the MSC legislation and give tax advisers an interesting insight into its interpretation. Note also that HMRC revised and published its interpretation of the legislation in Spotlight 32 on GOV.UK on 1 May 2019. It is worth noting from this that:
- HMRC reinforced its opinion that arrangements which fall within the definition do not work.
- HMRC is pursuing such arrangements in many different sectors and will open further enquiries where warranted.
- The legislation provides HMRC with the powers to transfer debts to other parties such as the MSC directors and the MSC provider directors or associated persons.
Key issues examined at the Tribunals
- Whether Costelloe Business Services Limited (CBS) was a “Managed Service Company (MSC) provider” under the legislation at ITEPA 2003 Part 2 Chapter 9; and
- Whether CBS was “involved” with the companies using its services.
- The Upper Tribunal also considered the concepts of promotion or facilitation of the use of a company and the provision of services of an individual to hold significant weight in considering whether the definition of an MSC was fulfilled.
- The Upper Tribunal also considered that the way in which CBS configured payments to the workers amounted to an additional degree of control and influence. In this case, CBS used an algorithm which calculated and distributed a salary and a dividend to the individuals, who consented to receive it without exerting any influence over what they could receive. CBS also held the MSCs’ money in a bank account and controlled what happened to it.
The facts of the case as heard by the First and Upper Tier Tribunals
CBS set up five single shareholder/director companies. The shareholders were two doctors, two social workers and a physiotherapist. Their services would be provided to clients. In return for a management charge, CBS offered a “Gold Business Service”, which included but was not limited to an invoicing service, a registered office, company accounts and corporation tax preparation and filing, and calculation and payment of salary and dividends together with RTI returns of PAYE and NICS. The salary part was set to NMW/NLW and the dividend calculated with the overall aim of minimising the individual’s tax liability.
Under the legislation set out at ITEPA 2003 s. 61B, introduced under the Finance Act 2007, the definitions of a MSC are set out. If any company falls within that definition, this results in an obligation to treat any dividends received as employment income, to be subject to PAYE and NICs, and the fee-payer (i.e. the MSC provider, or CBS) would be liable for an employer’s NIC contribution.
The FTT found for HMRC. Consequently Regulation 80 determinations were issued under the Income Tax (PAYE) Regulations 2003 (SI 2003/2682) as HMRC determined that all the companies were MSCs and CBS was a MSC provider. The question remained as to whether CBS was “involved” with the companies, even though it was initially agreed at FTT that CBS was an MSC provider, and later disputed it.
This was therefore the only issue which was debated at the UT, whereupon the UT, by considering the provisions set out at ITEPA 2003 s. 61B(2), found for HMRC once again on the basis that the degree of control and influence exerted by CBS was sufficient to point to its “involvement” with the MSCs. These provisions state:
An MSC provider is 'involved with the company' if (subject to exceptions not relevant in the present case) the MSC provider (or an associate of the MSC provider):
a) benefits financially on an ongoing basis from the provision of the services of the individual;
b) influences or controls the provision of those services;
c) influences or controls the way in which payments to the individual (or associates of the individual) are made;
d) influences or controls the company's finances or any of its activities; or
e) gives or promotes an undertaking to make good any tax loss.
(Incidentally, CBS was found by the FTT to have met the first, second and fourth tests - although meeting one would have been sufficient.)
An appeal was then lodged with the Court of Appeal.
The latest case verdict issued by the Court of Appeal (Civil Division)
The Court of Appeal decided, in dismissing the taxpayers’ appeal against the Upper Tribunal (Tax and Chancery Chamber) that the Upper Tribunal had correctly deduced CBS was a MSC provider and consequently, the taxpayers were Managed Service Companies in accordance with s.61B (1)(d) of ITEPA 2003. Therefore, the income was correctly classified as earnings from an employment under that legislation.
The basic rule of the MSC legislation – and why it differs from the Personal Service Company (“IR35”) legislation
The basic rule is that where an individual provides services through a MSC, any payment or benefit received by the worker or an associate of the worker is to be treated as earnings from an employment with the MSC, with the appropriate PAYE and NICs consequences.
However, where the MSC fails to meet its liabilities under this legislation, ITEPA 2003 s 688A is invoked. Known as the transfer of debt provisions, this allows HMRC to extend its reach to collect that debt from the directors of either the MSC or the MSC provider. This provision does not exist in the current IR35 legislation as set out at ITEPA 2003 Part 2 Chapter 8, although HMRC published a consultation document on 5 March 2019 seeking views on the detail of how the off-payroll working (IR35) rules will apply to medium-sized and large businesses in the private sector from April 2020 which closed on 28 May 2019 (see the ICAS response).
This consultation also sets out how the off-payroll rules will interact with the agency legislation, umbrella companies, managed service company legislation and the construction industry scheme. The government intends to include legislation in the draft Finance Bill 2020 to be published this summer.
The consultation states that if a worker is providing their services through an MSC, the off-payroll working in the public sector rules will apply.
Finally, MSC providers are also defined as being “involved” with the MSC, and there is no need to examine whether a hypothetical contract exists to establish the existence of a contract of service but for the existence of the intermediary company.
Practical considerations for tax advisers and clients
From a practitioner angle, it is important for the distinction to be drawn between the rules covering intermediaries in the private sector (as set out in Chapter 8 of ITEPA 2003 Part 2) and the public sector (Chapter 10 ITEPA 2003 Part 2) – i.e. the “IR35” rules - and the rules covering MSCs (as set out in Chapter 9 of ITEPA 2003).
It is important not to consider these chapters in isolation when advising clients, because in some instances it may be possible for a PSC to be caught under MSC rules in the same way as the Christianuyi scenario described above, simply by dint of its connection to a ‘management’ company (which may provide an “accountancy plus” service, for example by being involved in remuneration decisions and not simply book keeping). HMRC may deem the income to represent employment income, even when under Chapters 8 or 10, the PSC director would not be considered an ‘employee’ on a putative employment contact with the end user.
It would be dangerous to simply consider the IR35 rules alone to determine whether the hypothetical contract with the end user would constitute a quasi-employment without considering the MSC provisions at the same time. High-risk sectors such as road haulage, healthcare and education are typically affected here and firms should review PSC client arrangements to ensure their clients are not caught out by Chapter 9.
Conclusion
It has been interesting to follow this case through the courts and gain an understanding of HMRC’s and the Judiciary’s thought processes. No doubt other cases will come to the fore in due course. The question remains as to whether existing MSC providers will change their modus operandi as a result of this verdict.