Managed Service Company (MSC) ruling rings alarm bells

Despite having been introduced in 2007 case law on the MSC
legislation (Chapter 9 Part 2 Income Tax [Earnings and Pensions] Act 2003) is
relatively scarce. However, a recently published ruling, in  Christianuyi Ltd & Ors v Revenue &
Customs, from the First-tier Tax Tribunal should certainly ring alarm bells
with any agency or umbrella service provider using a personal service company
(PSC) model for their contractors. This especially as, anecdotally, the recent
changes to travel and subsistence tax reliefs has led to an increase in
individuals using PSCs through organised arrangements.

Under the MSC legislation if a deemed tax debt of an MSC is
not recoverable from the MSC or its directors office holders or associates the
debt can be transferred to a Managed Service Company Provider (MSCP) its
directors or any other party (and its directors) which ‘has encouraged or been
actively involved in the provision by the MSC of the services of the
individual’. This latter group could include the provider, and an agency where
there is a referral arrangement with that provider.

In the ruling five PSCs were found to be MSCs and a
consequent tax debt accrued as tax had not been paid as employment income, a
requirement where the MSC legislation applies.  In this case the payroll provider CBS (part of
the i4 Group) which had set up the arrangements under a scheme known as GBS
that managed payments and taxes for the PSCs, reported to be on the basis of
legal advice provided by a firm of Solicitors, was found to be a MSCP.  It is understood that HMRC is seeking a
transfer of the tax debt to CBS. Whilst the decision may still be appealed what
is most notable is that the judgment implies that a provider of this kind of scheme
will be an MSCP because it is “involved” by reason of any fee arrangement that
is capable of being linked to the PSC’s services.

“The tribunal ruled that the word “involvement”, used in the
legislation, should be interpreted broadly” explained Ben Grover of the
recruitment law specialist Lawspeed. He continued “The provider charged the
PSCs in a variety of ways (a fixed percentage fee, a fixed amount as and when
work was done and a fixed annual fee) and the decision was that all three modes
of remuneration amounted to CBS benefitting financially on an ongoing basis. This
meant that the criteria for MSC tax debt arose and the debt transfer provisions
will then come into play if the debt is not paid. Whilst a decision of the
First-tier Tax Tribunal will not work as a formal precedent, the judgment
clearly indicates how tribunals will look at similar PSC arrangements.”

“The moral of the ruling is that agencies should undertake
thorough due diligence when dealing with service providers that operate a PSC arrangement
where payment to the contractors is not by way of employment income. Agencies
should also be wary of claims that ‘legal advice has been obtained’ as proof of
compliance.”

Ben Grover and the Lawspeed team will be
discussing this ruling and its impact at its forthcoming seminar, “Taxing
Times?” on Thursday 16th June at Garfield House, Marble Arch in London.  The seminar aims to ‘un-confuse tax” and
covers Agency Tax (Section 44-47 ITEPA), Construction Industry Scheme (CIS),
Travel & Subsistence Expenses, Managed Service Companies (MSC), IR35, VAT
and Other Limited Company Models, Public v Private Sector, Offshore Companies,
Liability and Which Contracts to Use.