BKL tax specialist David Whiscombe examines the recent decision in Christianuyi Ltd and others v HMRC [2018] UKUT 10 (TCC): the first case to address the managed service company (MSC) legislation at ITEPA 2003 Part 2 Chapter 9.
Although the legislation on Managed Service Companies at ITEPA Chapter 9 has been in force since 2007, the first case did not come before the First-tier Tribunal until 2016. HMRC’s victory in that case has now been upheld by the Upper Tribunal in Christianuyi Ltd and others v HMRC [2018] UKUT 10 (TCC). On the face of it the decision is not at all surprising, but the detailed observations of the Upper Tribunal warrant close examination by anyone involved in advising in this area.
In writing about the recent decision is Christianuyi Ltd and others v HMRC [2018] UKUT 10 (TCC) one is tempted to say, “Taxpayers lose hopeless case” and leave it at that. But the decision warrants rather closer examination than that. It is the first case to address the Managed Service Company legislation at ITEPA Chapter 9 and the careful analysis that the Upper Tribunal (“UT”) gives of the legislation and of the reasoning of the First-tier Tribunal (“FTT”) (which it upholds in almost every respect) is well worth reading.
The basic rule is that where a “worker” (as defined) provides his services through a “Managed Service Company” (as defined) (“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 NIC consequences. More than that, if an MSC fails to meet these liabilities, the “debt transfer” rules at ITEPA s688A entitle HMRC to collect them from a range of other people including any director of the MSC or of the “MSC provider”.
Distinctions between MSCs and PSCs
There are, perhaps, three principal distinctions between an MSC and its older sibling the “Personal Service Company” (dealt with at ITEPA Chapter 8 and to which IR35 applies).
The first is the existence of the “debt transfer” rules mentioned above.
The second is that in the case of an MSC it is not necessary, as it is in the case of a Personal Service Company, to examine whether a hypothetical contract between the “worker” and the “client” would have been a contract of service: it is sufficient that the MSC’s business consists in providing the services of an individual “worker” to other persons and that all or most of the consideration for the services finds its way to the worker in (broadly) a tax-efficient way.
The third distinction is that an MSC is characterised by the existence of “an MSC provider” that is “involved” with the company. And that was the battleground in Christianuyi.
The facts in Christianuyi
The case concerned five “one person” companies established to provide the services of their owners (two medical doctors, a couple of social workers and a physiotherapist) to end-users. What they had in common was that they had all purchased the “Gold Business Service” offered by a company called “Costelloe Business Services Limited” (“CBS”). It seems that in this they were representative of some 1,000 or so such customers.
The Gold Business Service “product” was a standardised product offered to individuals. It consisted of a package including business services, accounting services, payroll services, VAT returns, annual accounts and tax filing. Thus, CBS provided each customer with an off-the-shelf company (though a small number of customers chose to use their existing company), registered office, company secretary and company email account. It raised sales invoices on behalf of each company, collected money, reconciled ledgers, maintained books and prepared accounts. It calculated gross salary (in 99% of cases on the basis of the minimum wage) and paid out the remaining profit as dividend. In due course it completed tax returns for each company and (having held back the appropriate amount of tax) paid it to HMRC on behalf of each company.
It was not in dispute that the five companies all met the conditions at s61B(1)(a) to (c) and were therefore potentially MSCs. The only point at issue was whether CBS was an “MSC provider” and was “involved” with the companies. If it was, each of the companies was an MSC with all the unfortunate consequences that would follow. If CBS was not an “MSC provider” (or if, although an “MSC provider”, was not “involved” with the companies) the companies were not MSCs – though they might then have been personal service companies within the scope of IR35.
Before the FTT the Appellants had conceded that CBS was indeed an MSC provider, so that the point of dispute before the FTT was only whether CBS was “involved” with the companies. Before the UT it was sought to withdraw that concession and to argue that CBS was not an MSC provider at all. The UT concluded both that it had jurisdiction to allow the withdrawal and that in all the circumstances (including the fact that HMRC were keen to have the point determined) it should allow the point to be argued.
Was CBS an “MSC provider”?
The definition of “an MSC provider” is “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals”. It is incidentally worth noting that for the purposes of the MSC legislation, “company” means a body corporate or a partnership, so – counter-intuitively – a partnership can be a “Managed Service Company” (though in Christianuyi all the entities were indeed companies).
The Appellants purported to identify some ambiguity in the definition, asserting that it might be read as meaning either
- That, in order to be an MSC provider, a person* must promote or facilitate the use of companies, which companies are then used to provide the services of individuals;
or
- That, in order to be an MSC provider, a person* must promote or facilitate the services provided by the companies it has promoted or facilitated.
*In fact, the contention attributed to the Appellants in the decision is that “a company” must promote or facilitate etc. But this is clearly wrong: there is no requirement that an MSC provider should itself be a company.
The Tribunal saw no ambiguity to be resolved: it concluded that it was plain that s61B set out a perfectly straightforward two-stage test:
First, does the putative MSC provider promote or facilitate the use of a company?
If so, does that company provide the services of individuals?
Crucially, the Tribunal held that the “MSC provider” test does not itself require the putative provider to promote or facilitate the provision of services. It was sufficient that the putative provider should promote or facilitate the use of a company that provides the services of individuals. On that basis, CBS was plainly an “MSC provider”.
Was CBS “involved”?
Having disposed of this new ground of appeal, the UT went on to consider the decision of the FTT on the only matter that had been before it, namely whether CBS was “involved” with the Appellant companies.
This in turn required consideration of ITEPA s61B(2). This provides that 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
Note that the sub-paragraphs are disjunctive – meeting any of the five tests is good (or bad) enough. In fact, the FTT had held that CBS met the tests at (a), (c) and (d).
Counsel for the Appellants had invited the FTT, in construing s61B, to have regard to Hansard in order to establish the mischief at which s61B was aimed. The FTT had declined to do so. The UT found no fault with that: although Pepper v Hart had established that it could sometimes be appropriate to have regard to Parliamentary materials, this could only be in order to cure some ambiguity, obscurity or absurdity in the legislation. Since the Appellants had identified neither ambiguity nor obscurity in the legislation and absurdity was expressly disavowed it followed that the decision of the FTT was unimpeachable in that regard. And in any case, the UT had for good measure looked at the Parliamentary materials and found nothing in them that would have been of assistance even if it had considered them to be admissible.
The Tribunal went on to consider each of the three sub-headings of s61B(2) (a), (c) and (d) and came to broadly the same conclusions as the FTT, though differing in one or two matters of detail.
The basis on which CBS had been remunerated had varied over time. Initially, the charge had been 5% of each invoice transaction. Subsequently, the charge had been changed to a fixed charge of £35 “as and when work was done” and finally to a fixed annual charge, apportioned either weekly or monthly. The Appellants conceded that on the first basis of charging there was a sufficient causal link between the provision of services by the individual and the financial benefit to CBS for s61B(2)(a) to apply; but asserted that as regards the subsequent arrangements the link between the individual’s services and the amount of the fee was too loose for it to be said that any financial benefit arose “from” the provision of the services. The FTT had considered that there was on the facts “a sufficiently close link”; the UT went further and rejected the contention that the law implied any requirement of “proportionality or correlation” between the amounts earned from the provision of the individual’s services and the charges made by CBS. The Tribunal recognised the implications of such a broad interpretation and – slightly worryingly – left open the question whether a person providing solely payroll services to a company which met the requirements of s61B(1) (a) to (c) (and which was therefore potentially an MSC) might fall to be considered an “MSC provider”.
As regards s61B(2)(c), the UT observed that the whole point of the structure offered by CBS was to enable customers to receive by way of salary and dividend that which they would otherwise have received as salary. In that sense CBS certainly “influenced” the way in which payments were made. Further, there was no evidence that any of the customers took any part in the decision to pay dividends (rather than, for example, to retain profits within the company): that decision was taken solely by CBS and “control” had to that extent been shared with or ceded to CBS. Thus, the test in s61B(2)(c) was met.
Finally, as regards s61B(2)(d), the UT considered that the phrase “influence or controls the company’s finances or any of its activities” was very broadly framed. CBS incentivised the companies to use a particular form of banking account, by imposing a 5% surcharge on other methods of payment. The UT recognised that CBS derived significant commercial advantages from that: but that was precisely the point – by imposing the surcharge CBS was influencing the companies’ finances. The UT drew back from the FTT’s finding that merely by deducting – in advance – the money necessary to pay tax, CBS was influencing the companies’ finances: on the contrary, in doing so it was simply performing part of the service for which it was being paid. But in holding the money in an interesting-bearing account and (contrary to its agreement with the customers) failing to account for the interest, CBS had “controlled” the companies’ finance or other activities. CBS thus met the s61B(2)(d) test.
HMRC had to win only on one of the five possible s61B(2) tests to get home. In fact, they won on three and the appeal failed.
It was, as we have said, a case that bears close examination and which raises interesting points.
Nonetheless, when all is said and done, “Taxpayers lose hopeless case” might not be an entirely inaccurate summary.
This article was first published by Tax Journal. It is available to subscribers on the Tax Journal website.
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