HMRC has won the first case brought to the Tax Tribunal using the Managed Service Company (MSC) legislation, Christianuyi Ltd & Ors v Revenue & Customs.
Tribunal Judges Guy Bannan and John Woodman rejected the appeal by five medical contractors that their companies and earnings were not controlled by MSC provider Costelloe Business Services Ltd (CBS) during the 2007/8 and 2009/10 tax years.
As a result, the five medical and healthcare contractors being heard in the tribunal face back taxes of £160,000 between them. In a separate case, HMRC is also planning to transfer tax debts to the MSC provider CBS.
More MSC cases to come
In their ruling, the two judges confirmed that this is a landmark case, as it is the first MSC trial to reach the tribunals: “We understand that these are the first appeals in which the MSC legislation has been considered.”
However, of greater concern to contractors is that there are more to come, as Judges Bannan and Woodman highlight: “We also understand that there are a number of other appeals concerning this legislation which are pending before the First-tier Tribunal.”
According to ContractorCalculator CEO Dave Chaplin, this ruling and the facts of the case are a stark warning for contractors to do their due diligence on all tax schemes that go beyond basic service provider-contractor relationships.
“The evidence presented in this case clearly shows that the contractors were using an MSC. It also shows that the contractors involved had a poor understanding of where their money came from, so it’s no surprise they have been landed with substantial tax bills.”
CBS turning its composite offering into an MSC
CBS was part of the Isle of Man-based i4 Group, which the ruling determined offered a ‘composite company’ product prior to the introducing of the MSC legislation in 2007.
i4 Group’s operations were extensive, as the ruling notes: “i4 UK operated approximately 30 of these composite companies each of which had between 20 to 30 individuals providing their services.”
The ruling goes on to say that: “The proposed MSC legislation, however, prompted the i4 group to develop a new product which would be put in place by April 2007 to enable existing composite company clients to switch over onto the new product which, it was intended, would not be caught by the new rules.
“This new product became known as the Gold Business Service (GBS) and was intended to be used by personal service companies(PSCs) i.e. companies that were solely owned by each individual client (who had previously been composite company clients) and who would also act as the director of their own personal service company.”
CBS created 1000 new PSCs during 2007-2010
Once the MSC legislation came into force, CBS went on to create 1400 new companies in the period 2007 to 2010, 1000 of which were personal service companies. Most of these companies used CBS for their registered address and for company secretarial services.
Several key signs that that the contractors concerned were not in control of their own affairs emerged during this period: the contractors were unaware of the need for a registered office address and that they had a choice; and none were given guidance about the requirement for a company secretary and that they could appoint their own.
In fact, one of the contractors whose appeal was overturned in this ruling, Dr Jacek Trzaski, was: “was unaware that he had a registered office or that he needed one” and was unaware that he had needed a company secretary or, indeed, that he had one.”
Contractors involved in tax schemes should take action now
Chaplin believes that this case demonstrates HMRC is serious about enforcing the MSC legislation and clearly has set aside resources to do this: “In a single ruling, we’ve seen the contractors’ appeal overturned, evidence that HMRC is working on many similar cases and that the taxman is going down the debt transfer route.
“What this means is any contractors who participated in tax schemes of a similar nature should take action now by talking to their accountant or tax adviser. In fact, if a contractor has received anything more than a vanilla accountancy service from their service provider, they could unwittingly have signed up to a scheme.”
Chaplin concludes: “We have already reported on the signs that it was coming and now we have the evidence: MSC enforcement is yet another attack on UK contractors, but one that contractors could have readily avoided by common sense due diligence.”