2016 - MSC blog: Surprise that’s not so Surprising: HMRC win First MSC Case in Court.

Jack Bonehill, Tax Consultant at Aspire Business Partnership LLP, comments on the first court hearing in relation to the managed service company (‘MSC’) legislation.

Since the introduction of the MSC legislation on 6^th April 2007 there has not been a court hearing to enable us to sees how MSC legislation would be interpreted by a tribunal – until the 21^st April this year. The case Christianuyi Limited and others (the appellants) v HMRC (the respondents) sends a message that HMRC may seek to win more of these cases following their success.

Overview

The case involved five customers of Costelloe Business Services Limited (‘CBS’), these being the appellants, with CBS as the alleged involved MSC provider. The product offered by CBS was called the Gold Business Service (‘GBS’), and was CBS’s response to the introduction of the MSC legislation.

There are 4 conditions that must all be satisfied for a company to be an MSC. The core question in this case is whether there is an MSC provider involved with the companies; more specifically, whether CBS was involved with the companies. There was no contention that the other conditions were met. There was also no contention that CBS was a MSC provider.

An MSC provider is involved with a company if the MSC provider:

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

Only one of these conditions needs to be met.

Summary

CBS was deemed to be an MSC provider involved with the companies: they were deemed to meet conditions (a), (c) and (d) by the tribunal.

Condition (a): does the MSC provider benefit financially on an ongoing basis from the provision of the services of the individual?

In the tribunal’s view, meet this condition, because:

• Fees were only charged by CBS when a payment was received by the appellants, which was when services were performed. This created a direct link between the fees and the services.
• In periods when no work was done and therefore no payment was received by the appellant companies, CBS did not chase the companies for payment of accountancy fees at a later date.
• CBS deposited tax-amounts deducted into their own accounts which accrued interest and such a deduction was only made each time the companies were paid.

Condition (c): does the MSC provider influence or control the way in which payments to the individual are made?

In the tribunal’s view, CBS did meet this condition, because:

• CBS gave the individuals who owned the limited company three choices as to how they were paid; if an individual did not choose they were put on what they called the minimum wage model automatically. When this was done, it constituted control. 
• Dividends were part of payments, but many individuals didn’t know what dividends were. There was no evidence to suggest that advice was given and individuals chose the surplus cash to be paid in this way. This suggests control or at the very least influence.
• No dividends had been passed by resolution; automatic and generic minutes of meetings were used when, in fact, no meetings had even taken place.

However, the tribunal also said:

• If the individuals authorised CBS to act on their behalf, there was no control or influence provided the individuals were aware of what CBS were doing.
• The registration form did not include authority to determine the amount of dividends, for example, and so any work in this area would be considered control or influence. No advice was given in relation to this, either.
• The burden on proof rests with CBS.

Condition (d): does the MSC provider influence or control the company’s finances or any of its activities?

The tribunal rules that CBS met this condition, because:

• The appellants had to indicate whether they wanted to open a CredEcard account or whether to use an existing bank account; using an existing account came with a charge. However, the tribunal said in their view that using the CredEcard account did not in itself result in control, as the client authorised it. However, the charge (which was 5%) constituted influence as it was meant to persuade the clients to choose the CredEcard account.
• CBS took deductions to pay taxes from the clients’ accounts long before the tax was due and disposed of it into a CBS bank account where the amounts accrued interest; they considered this means they CBS influenced and controlled the clients’ finances. The clients were also unaware that this happened.

Points to take away

This case shows how important it is not to become an MSC provider when the only condition that could stop a company being an MSC is because there is no MSC provider involved with the company.

It is important that, if one is relying upon the exemptions from being an involved MSC provider, they merely provide accountancy service or legal services in a professional capacity, or that they merely carry on a business of placing individuals with persons who wish to obtain their services.

If the exceptions are not met and one is an MSC provider, it is almost inevitable that they are involved.

View the full case here.