In 2016, the First Tier Tax Tribunal delivered a landmark ruling in the case of Christianuyi Ltd and others v HMRC, when it confirmed that five companies who were clients of Costelloe Business Service Ltd (CBS), the MSC provider (MSCP), were caught by the Managed Service Company (MSC) Legislation.
At the original hearing, the five appellant client companies accepted that CBS was an MSCP, so all that needed to be considered for the MSC Legislation to apply was whether or not CBS was ‘involved’ with its client companies.
As to whether or not an MSCP is involved with their client, this is defined by reference to just any one of five activities:
The First Tier Tribunal concluded that CBS was involved with its clients and their appeals therefore failed. Not taking this lying down, however, an appeal was progressed to the Upper Tribunal.
Appeals from the First Tier Tribunal to the Upper Tribunal can only be made on points of law, so the main focus of the appeal was that the First Tier Tribunal had erred in law in respect of its interpretation and application of the MSC Legislation, and also to now argue that CBS was not an MSCP.
Legislation defines an MSC as either a company or a partnership whose:
The appellants contended that the wording of S.61B(1)(d) ITEPA 2003 (promoting or facilitating the use of companies) was “ambiguous” and could either mean:
The Tribunal however rejected this argument saying that the legislation sets out a straightforward two-stage test for determining whether a company is or is not an MSCP, ie:
a. Firstly, does the organisation promote or facilitate the use of a company?
b. Secondly, if so, does that company provide the services of individuals?
Applying this test CBS was an MSCP.
It was contended that the First Tier Tribunal had erred in law deciding that fixed fees paid to CBS amounted to them “benefitting financially on an ongoing basis…”
The letter of engagement sent to clients in March stated that CBS would charge 5% plus VAT (4.75% post tax) per invoice transaction. In July 2007 however, CBS moved to a fixed fee of £35 + VAT each time work was undertaken. The fee structure changed yet again in December of that year, where an annual fee of £1,350 + VAT was introduced. Despite this, CBS continued to invoice clients on an ad-hoc basis.
It was argued that CBS earned a fee because they were providing a service to the PSC and that fee was linked to the amount or value of the service provided and not to the extent, nature or value of the work done by the contractor. The fact that CBS received a fee when the individual worked was a natural consequence of the fact that CBS received fees only when it provided services to the PSC, and it was the contractor’s work which generated the payments to the PSCs which, in turn, created the need for CBS’s services. The size of the fee was determined by the number of times that CBS performed the services and not the amount or value of the services provided by the individual.
This argument was, however, rejected by the tribunal as the legislation does not require any degree of proportionality or correlation between the amounts earned as a result of the provision of the services of the contractor and the extent of the financial benefit to the MSCP.
CBS deducted tax and NIC from its clients to cover PAYE, NIC, corporation tax, and VAT. These deductions were made in accordance with the agreement contained in the registration form. The monies were then held by CBS in its own interest-bearing accounts. At one stage over £4 million was transferred into their account over a 22-month period earning interest of £127K. None of CBS’s clients were aware that the monies ringfenced for paying their taxes was also accruing interest for the benefit of CBS alone.
It was clear that tax deductions had been made out of the gross receipts of the clients and it was from these deductions that CBS derived its financial benefit, so once again another argument was dismissed.
The tribunal did, however, confirm that deducting taxes on behalf of clients was simply a service that CBS offered, and which clients chose to accept, and therefore did not amount to CBS influencing the finances or activities of its PSC clients.
The CBS registration form invited clients to indicate whether they wished to use what was called the ‘minimum wage’ model. In practice, clients extracted money from their PSCs by way of a combination of payments of remuneration (equal to the minimum wage) and the balance transferred to their own private bank accounts.
Whilst the registration form allowed clients to select another ‘specified amount’, there was no guidance as to what that should be, and CBS did not advise clients on which type of remuneration structure would best suit their needs.
The tribunal found however that CBS exercised control in respect of all dividends received by contractors. CBS determined that the surplus should be paid as dividends and carried out the necessary steps to obtain this outcome.
It was confirmed by the tribunal that where a client mandated CBS to debit its account and notified the bank of this authority, then the bank was acting in accordance with the instruction of its customer, and CBS was neither influencing or controlling the behaviour of its client. However, where the instruction to the bank did not exist, and the authority existed simply between the client and CBS, who then directs the bank, then that is entirely different.
All of the appellants arguments were dismissed and therefore the MSC Legislation was applicable, causing all their income to be subject to PAYE tax and NIC.
CBS had around 1,000 clients, who will now be deemed MSCs, and it is estimated that the total liability will be in the region of £6M which can be collected from the MSCP and its directors as the debt transfer provisions of the MSC Legislation allow.