Taxman curbs use of MSC avoidance schemes

HMRC is clamping down on the use of live tax avoidance schemes falling under the management service company (MSC) legislation after winning a Court of Appeal hearing against Costelloe Business Services

The tax authority won the case based on the argument that the MSC legislation (Chapter 9 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 and equivalent National Insurance contributions legislation) applied to arrangements established and run by a third party, Costelloe Business Services Ltd (CBS).

Following an appeal, the Upper Tribunal agreed with the original First Tier Tribunal (FTT) decision that the companies were operating as MSCs.

In addition to the original decision, the Upper Tribunal considered two additional areas. The first concerned the definition of an MSC provider as ‘a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals’.

Secondly, the Upper Tribunal decided that ‘influences’ or ‘control’ has a wider meaning than that expressed in the FTT decision. In this case, CBS influenced how payments were made to workers through the use of a standard product, by causing the workers to receive wages and dividends instead of just wages.

When workers buy into such products, allowing the MSC provider to determine the amount to be paid as a dividend and to carry out the administrative steps to affect this, it amounts to ‘control’, HMRC states.

A further appeal on 5 March resulted in the Court of Appeal agreeing with the Upper Tribunal decision about the definition of an MSC provider. The court ruled that the ‘CBS was undoubtedly an MSC provider and that the appellant’s companies are undoubtedly MSCs’.

HMRC says the court’s decision confirms its view that if the answer to both of two questions is yes, a person is a MSC provider. These questions are: does the person promote or facilitate the use of a company? and does that company provide the services of individual?

In its spotlight guidance, HMRC states that where a company is set up to provide a worker’s services to an engager and the MSC legislation applies, amounts paid to an MSC for those services that are not already subject to PAYE income tax and Class 1 NICs (for example, share dividends), are treated as employment income.

HMRC’s firm view, supported by the tribunal and now Court of Appeal decisions, has always been that these types of arrangements do not work.

It continues to open enquiries into users of similar arrangements that include the provision of workers in many different industry sectors, including road haulage, healthcare and education.

Describing the recent win as ‘emphatic’, HMRC said it now expected those using these or similar arrangements to pay any tax and NICs owed, or face investigation and challenge.

If any part of the tax and NICs are irrecoverable, HMRC will transfer unpaid debts to others, including the service company’s directors, the MSC provider and the MSC provider’s directors and associates. All are jointly and severally liable for the debts.

Report by Pat Sweet

HMRC Guidance Managed Service Company legislation: unpaid PAYE and Class 1 NI contributions avoidance schemes (Spotlight 32)

FTT decision

Upper Tribunal decision

Court of Appeal decision

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