Contractors: Beware New Managed Service Company Rules

The UK taxman previously found it extremely difficult to enforce the old IR35 rules on personal service companies being used by contractors, say experts at Capital Consulting. So MSC legislation came into force back in April 2007. Broadly speaking the regime applies to contractors who use Managed Service Company Providers.

MSC Providers are defined very widely, and are intended to include organisations providing services ‘influencing’ the way in which payments are made to the contractor company’s activities. This might include any adviser, but the definition of MSC Providers provides some help by excluding from the definition of MSC Providers persons just ‘providing legal or accountancy services in a professional capacity’.

Consequently, the accounting services industry has grown significantly for the purpose of helping aspiring contractors set themselves up through limited company vehicles. If contractors’ limited companies are deemed to be managed by MSC Providers, then all income produced under the limited company needs to be treated on a PAYE basis and effectively cutting out the possibility of gaining the more tax efficient salary/dividend option.  Furthermore, if the MSC Providers do not settle the appropriate taxes and national insurance contributions deemed to be due on the contractor’s income, that tax can be transferred to the MSC Provider and ultimately onto the directors of the MSC Provider.

The first case to test the MSC legislation, Christianuyi Limited and others v HMRC [2016], occurred in April this year. The organisation that was really on trial here was the MSC Provider, Costelloe Business Services Ltd (CBS). In order for the MSC legislation to apply there has to be both an MSC Provider and that Provider must be ‘involved’ with the MSCs.

CBS actually admitted to being an MSC Provider but denied being deemed to be ‘involved’ with the MSC companies. There are five tests of ‘involvement’ in the MSC legislation, and only one of these tests has to be met for the involvement condition to be applicable.

Interestingly, CBS did not claim the exemption for legal and accountancy services.

In this case HMRC accused CBS of three forms of involvement: benefiting financially whenever the worker actually provided their services; influencing or controlling how the worker received their payment; or influencing or controlling the worker’s company finances or other activities. The tribunal concluded that all three forms were satisfied so the MSC legislation applies.

Apparently CBS advised around 1,000 service companies, however only five were the subject of this test case. Tax due from the five named companies amounts to approximately GBP £160,000.

CBS made a few blatant mistakes in the management, say Capital Consulting, by: using its own bank account for monies due to the MSCs and keeping some of the interest that arose from the bank account; charging each MSC fees for only when the worker was actively providing a service; and admitting that board minutes drawn up for each MSC were false.

The UK taxman is also chasing the tax amounts not paid from CBS and its directors and it should be noted that the net can technically be cast wider to include anyone who can be clearly seen to have ‘encouraged’ or been ‘actively involved’ in the worker establishing an MSC.

This case will clearly shake the contracting industry and cause many to review their existing structures to ensure that they cannot be potentially attacked in the same manner.