Managed Service Company ruling rings alarm bells, says Lawspeed
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. A recently published ruling, in Christianuyi Ltd & Ors v Revenue & Customs, from the First-tier Tax Tribunal should ring alarm bells with any agency or umbrella service provider using a personal service company (PSC) model for their contractors, according to Lawspeed. 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.
Ben Grover of Lawspeed, commented, “The tribunal ruled that the word “involvement”, used in the legislation, should be interpreted broadly.
“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.”