Personal Service Companies Under FirePrint publication
Christianuyi Ltd &Ors v Revenue and Customs 
HMRC has successfully argued that a number of personal service companies (PSCs) which were used to provide the services of individuals to end-user employers fell within the scope of the Managed Service Companies (MSC) legislation, meaning that HMRC is entitled to recover a backlog of income tax and national insurance contributions from those PSCs. Further, HMRC has stated that if it is unable to recover this debt, it intends to use the extended recovery powers which allow tax to be reclaimed from the directors of the PSCs, the provider of the MSCs and the provider’s directors and associates or any other party that has encouraged or been actively involved in the MSC arrangement.
This is the first case on the MSC legislation to be heard by the Tribunal, and HMRC has indicated its view that this success will pave the way for a number of challenges against similar schemes.
The MSC legislation was introduced in 2007 to strengthen HMRC’s armoury when dealing with individuals who provide their services through intermediary companies in order to achieve an enhanced tax position. Broadly, the MSC rules will apply if a company is used to provide the services of an individual, and an MSC provider is ‘involved with’ that company. If the rules apply, the MSC is obliged to account for income tax and national insurance contributions (IT/NICs) as if the individual were an employee.
Prior to the MSC legislation, this area was governed by the intermediaries legislation (formerly known as the IR35 rules). These rules set out the circumstances when HMRC will treat a PSC as masking a taxable employment relationship between the worker and the employer. IR35 continues to apply, however the MSC legislation strengthens HMRC’s position beyond IR35 because:
- if the MSC test is satisfied, there is no need to establish (on a case by case basis) whether or not the individual has an ’employment’ relationship with the end-user employer; and
- HMRC’s recovery powers are extended so as allow recovery from other parties, including the MSC provider, if recovery is not possible from the MSC itself.
Facts of the Case
In the Christianuyi case, five PSCs used the services of a MSC provider (the Provider) in connection with the provision of the services of individuals to ’employers’.
The Provider carried out much of the activity relating to the administration of the PSCs. In particular, the Provider incorporated the companies, provided a registered office and company secretary, invoiced the end-user employers for the individuals’ services, prepared annual accounts, paid corporation tax to HMRC, and managed the payment of dividends to the individuals.
The appellants accepted that the Provider fell within the definition of ‘MSC provider’, and that it was not entitled to benefit from the professional services exclusion (which exempts ordinary legal and accountancy services from charge under the MSC provisions). The appellants argued that the MSC legislation did not apply because the Provider was not ‘involved’ with the PSCs, as detailed in s61(B) ITEPA03.
The Tribunal dismissed the appellants’ position, and held that the Provider was ‘involved’ with the PSCs on the basis that (amongst other things):
- the amount of the Provider’s fee was determined by reference to the amounts received by the PSCs for the workers’ services;
- the individuals did not attend any directors / shareholders meetings and the Provider controlled the amount of the dividend paid to the individuals; and
- the Provider controlled the PSC’s finances by putting in place its banking arrangements, and by deducting tax payments (often significantly in advance of the due date for such payments) and accounting for such tax to HMRC.
On that basis, the tribunal held that the MSC legislation applied and that IT/NICs were due. HMRC is therefore entitled to raise assessments for IT/NICs against the PSCs. If the debt cannot be recovered against the PSCs or their directors (which may well be the case, as the PSCs are unlikely to hold many assets, and the individual workers involved were all foreign nationals working temporarily in the UK), HMRC is entitled to pursue any party that has ‘encouraged or facilitated the arrangements’. It is therefore expected that HMRC will in due course pursue the Provider for the debt.
Many PSC arrangements will be under increased scrutiny following this decision. The MSC legislation significantly streamlines HMRC’s recovery process as it removes much of the ‘case by case’ analysis burden associated with IR35. It is believed that many other similar cases were on hold, pending the outcome of this case, and HMRC may now be emboldened to issue assessments and/or follower notices and accelerated payment notices to potential targets.
However another key impact likely to follow this decision has not yet been tested. Assuming that some or all of the amounts in question cannot be recovered from the PSCs, HMRC will then presumably seek to recover this debt from the Provider and also any other party involved in the arrangement, which could potentially include employing businesses or agencies. This area of the legislation has not yet been tested, and it remains to be seen how wide-ranging this recovery power will prove to be.