The Resurrection of Managed Service Company Enquiries

It seems that HMRC have recently started to show a renewed interest in the compliance issues around the Managed Service Company (MSC) legislation. In particular, HMRC seem to have been targeting certain accountancy service providers who have been providing Personal Service Company clients with their services.

Clearly HMRC feel they have sufficient information about the services being provided by certain accountancy service providers to allow them to issue determinations to over 1,000 PSCs with claims for underpaid PAYE and NIC, in some cases with liability of around £50,000 per determination.

For those less familiar with MSC legislation, which was introduced with effect from 6 April 2007, the intention was to allow HMRC to combat the perceived tax abuse by contractors who provided their services through a limited company of which they were one of a number of unconnected shareholders, commonly known as composite companies.

As shareholders, the contractors in these composites were paid in a tax-efficient manner even though they had no control over the running of their company or a role in running it.

The legislation allowed HMRC to deem a contractor to be an MSC, similar to IR35 legislation requiring operation of PAYE and NIC on payments received.

For a company to be an MSC, it must fulfil four conditions:

• It provides the services of an individual to others;
• It pays that individual all or most of the fees it charges to those others;
• It pays the individual in a way which increases the net amount received by the individual, as compared to what they would have received net if they had earned the fees as their employment income; and
• There is an MSC provider, and that provider must be ‘involved’ with the company

The critical part of the MSC legislation is that there must be an MSC provider involved in facilitating the arrangement.

An MSC provider is defined as “a person who carries on a business of promoting or facilitating the use of companies to provide services of individuals”.

An accountant is excluded from the legislation if he is simply providing their accountancy services, but a firm of accountants that carry out a discernible part of the business to specifically market and/or provide corporate solutions or services to PSCs would be classed as an MSC provider to that part of the business.

It does not automatically follow that the client company of an MSC is an MSC itself.  Crucial to the legislation is whether or not the MSC provider is involved with its client company. If the MSC provider is not “involved” then the legislation does not apply. “Involved” is defined by reference to any one of the following five criteria:

• It benefits financially on an ongoing basis from the provision of the services of the individual;
• It influences or controls the provision of those services;
• It influences or controls the way in which payments to the individual (or associates of the individual) are made;
• It influences or controls the company’s finances or any of its activities; and
• It gives or promotes an undertaking to make good any tax loss.

The recent issue of determinations by HMRC will undoubtedly result in the targeted accountancy practices arguing that they are not an MSC provider. However, in the case of Christianuyi Ltd v. HMRC [2019] EWCA Civ 474, the Court of Appeal agreed with the Upper Tribunal that there was a straightforward two-stage test for determining whether a company was or was not an MSC provider. This was:

• Does the putative MSC provider promote or facilitate the use of a company?
• If so, does the company provide the services of individuals?

From this, accountancy practices will be rightly concerned that, with the wide interpretation taken from the drafting of the legislation, HMRC could quite easily reach the conclusion that there is an MSC provider.  The question then becomes: could this apply to many situations?  The further sting in the tail is that the MSC legislation contains transfer of debt provisions, which potentially allows HMRC to recover MSC debts from the MSC provider or agency if the PSC cannot pay.

There is surely more to come on this topic, and we will be watching with interest.