Costelloe Business Services Ltd (CBS) recently lost a case at the Upper Tier Tribunal to HMRC on the MSC rules. Although this may have been an extreme case there are a number of issues that have some interest to us all.
Firstly it is important to remember what an MSC actually is. It is found at S61B of ITEPA and was included in 2007. It says:
61B “Meaning of “managed service company”
(1) A company is a “managed service company” if—
(a) its business consists wholly or mainly of providing (directly or indirectly) the services of an individual to other persons,
(b) payments are made (directly or indirectly) to the individual (or associates of the individual) of an amount equal to the greater part or all of the consideration for the provision of the services,
(c) the way in which those payments are made would result in the individual (or associates) receiving payments of an amount (net of tax and national insurance) exceeding that which would be received (net of tax and national insurance) if every payment in respect of the services were employment income of the individual, and
(d) a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals (“an MSC provider”) is involved with the company.
(2) An MSC provider is “involved with the company” if 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.
(3) A person does not fall within subsection (1)(d) merely by virtue of providing legal or accountancy services in a professional capacity.
(4) A person does not fall within subsection (1)(d) merely by virtue of carrying on a business consisting only of placing individuals with persons who wish to obtain their services (including by contracting with companies which provide their services).
(5) Subsection (4) does not apply if the person or an associate of the person—
(a) does anything within subsection (2)(c) or (e), or
(b) does anything within subsection (2)(d) other than influencing the company's finances or activities by doing anything within subsection (2)(b)."
So basically there are issues if you are a business promoting or facilitating the use of companies and then you are involved in the company. CBS lost as they were clearly involved in promoting moving businesses from an associated umbrella company provider to their own PSC’s and then running them for them along the lines that they had been as an umbrella company. All the literature issued pointed to this so they were, in my opinion, going to have a very low chance of winning the case.
Due to this PAYE has become due on all payments including dividends. It is understood that overall this could amount to £6 million in the business covered by CBS.
How it affects accountants
There is an argument that by setting up and doing the accounts work for a company that you are facilitating it within the MSC rules. There is, however, the get out clause whereby HMRC say that qualified accountants fall outside this. Interestingly although CBS had a qualified accountant they did not bring this up at either tribunal. Also, there is actually nothing in the legislation outlining this view.
The issue is where an unqualified accountant is providing this service. Clearly, HMRC does not look kindly at these type of accountants.
The powers to catch companies like MSC’s are wide and the case did not provide us with any way of narrowing the type of cases that can be caught. It did go through a number such as payroll services but did not give any opinions.
We are therefore left a bit up in the air. However, if you are an unqualified accountant you should look at the services provided to PSC’s, in particular, to see if you could be caught as a facilitator. It is difficult to know what you can do apart from resigning from the client. There are other possibly better cases in the wings which may well make this clearer but it is a worrying time for some accountants who could be hit with bills they do not deserve.