Managed service company legislation (Spotlight 32)

02 May 2019


HMRC has won a case in the First-tier Tribunal (FTT) involving attempts to avoid PAYE Income Tax and Class 1 National Insurance contributions on employment income.


HMRC regularly publish ‘Spotlights’ which includes information you should be aware of about tax avoidance schemes that it believes to be live and widely available, to help those using them to avoid tax.


The latest ‘Spotlight’ is about a case where HMRC successfully argued that the managed service companies (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 Limited (CBS).


Following an appeal, the Upper Tribunal (UT) agreed with the original FTT decision that the appellant’s companies were operating as MSCs.


In addition to the original decision, the UT considered 2 additional areas.


Firstly, 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’. This decision confirms HMRC’s view that if the answer to both of the following questions is yes, a person is an MSC provider:


  • Does the person promote or facilitate the use of a company?

  • Does that company provide the services of individual?


Secondly, the UT decided that ‘influences’ or ‘control’ has a wider meaning than that expressed in the FTT decision. In this case, Costelloe Business Services Limited 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 effect this, it amounts to ‘control’.


A further appeal on 5 March 2019 resulted in the Court of Appeal (CoA) agreeing with the UT 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”.


Full details can be found in the latest Spotlight on GOV.UK.