In September 2025, HMRC published “Guidelines for Compliance - GfC13” relevant to taxpayers who are:
• Uncertain of the correct interpretation of the law after making their best efforts to resolve the ambiguity.
• Considering / adopting a novel or improbable interpretation of the law, including after taking professional advice
The guidelines highlight the legal obligation of the taxpayer to provide a tax submission document that is correct (in both fact and law) and complete to the best of their knowledge. In adopting a filing position, HMRC make it clear that:
• A taxpayer has an obligation to make best efforts to resolve uncertainty on how the law should be applied before making tax filings.
• When seeking professional advice, this must be from a suitably qualified advisor.
• Where more than one interpretation of the law might be applied, the taxpayer must choose the interpretation that they believe is, on balance, most likely correct.
• The taxpayer is encouraged to disclose any novel interpretation / uncertainty to HMRC.
One to many postal campaign
Since the publication of the new guidelines, HMRC have written to wealthy taxpayers, asking them to review this guidance and complete an anonymous survey to collate feedback.
Implications for taxpayers
The issued guidelines do not represent a change in the law but HMRC will no doubt refer to them when making an assessment of taxpayer behaviour in relation to penalties. Careful reference to the guidelines should help the taxpayer (in a self-assessment system) reduce the risks of compliance checks and unexpected tax liabilities.
The publication of these guidelines forms a significant part of HMRC’s broader efforts to enhance compliance standards targeted at both taxpayers and also advisers who from May 2026 will be subject to mandatory government registration.
To read the article on Tax Journal click: here
There were several measures introduced by the 2025 Budget that will be of particular interest to HNW internationally mobile individuals, and I highlight a few of these below.
£5m IHT cap for pre-October 2024 EPTs: There will be a £5m cap on IHT payable by a discretionary trust over a ten-year period (to include exit charges and the decennial charge) for pre-30 October 2024 excluded property trusts to be introduced with retrospective effect from 6 April 2025. This broadly means that trusts with more than £83m of excluded property will pay less IHT.
The cap will be stepped from 6 April 2025 (the date upon which these trusts will have become relevant property) to the first ten-year anniversary after that date as that period will not be as long as 10 years, in this period the cap is £125,000 per quarter.
This is a welcome concession given that the IHT trust changes were a key part of what made FA 2025 so troublesome for EPTs. The £5m cap applies per trust.
APR/BPR £1m allowance to be transferable between spouses: In relation to the changes to APR/BPR due to come into force from 5 April 2026, the Budget sets out that any unutilised amount of the £1m 100% relief allowance can be transferred between spouses.
Miscellaneous IHT provisions: Anti-avoidance IHT provisions are being introduced to address various government concerns, including in relation to situs of IHT chargeable assets, as well as restricting charitable exemption to gifts made directly to UK charities and community amateur sports clubs.
Extension to temporary non-residence rules: Currently the temporary non-UK resident anti-avoidance provisions do not apply where there is a dividend or distribution from post departure trade profits to the individual in a non-UK resident year. Where the year of return is 2026/27 or later this will change. The post-departure trade profits legislative provisions are to be removed. This means that an individual who returns to the UK, without more than five complete tax years of non-UK residence, will be taxed on all distributions/dividends they receive in the years of non-residence from: (i) UK resident close companies; and (ii) non-UK resident companies that would be close if UK resident where:
• they held the shares prior to departure; and
• they are either (a) a material participator in the company or (b) an associate of a material participator in the company.
Specific legislation will allow for relief in respect of any foreign tax paid.
Remittance basis: Specific technical amendments (to ensure that the legislation operates as intended) are to be made to the FA 2025 legislation that removed the remittance basis from 2025/26 onwards and introduced the residence-based tax system. There is no specific detail as yet, but it has been announced that there will be further developments to bolster tax incentives for high talent new arrivals. This appears to mean making changes to the current four-year FIG and foreign employment earnings regimes.
Offshore anti-avoidance legislation: The Budget documentation refers to the Government’s commitment to substantially simplify the offshore structure anti-avoidance provisions (such as the CGT attribution provisions and the transfer of assets abroad legislation). The Government has pledged to proactively engage with representative bodies and stakeholders in this regard. It seems unlikely that there will be any significant changes here before 2027/28.
Property: The tax burden on holding UK property will increase. A new separate tax rate is being introduced for property income which will be taxed at 22/42/47%, so at a higher income tax rate than any other income (relief for finance charges will continue to be restricted). In addition, the Budget introduced a high value council tax surcharge (HVCTS) to be introduced from 2028/29 with respect to properties valued at over £2m. Like ATED borrowing is not deducted and there are different rates depending on the value of the property. For 2028/29, the lowest rate is £2,500 for property worth between £2m and £2.5m with the highest charge being £7,500 for £5m plus properties. There will be specific provisions applying to properties held within structures. Specific reference is made to relief for those who are required to live in the property as a condition of their job.
Lynnette Bober, Director, Joseph Hage Aaronson & Bremen
• Original Article
Higher earners facing a barrage of tax threats are turning to investments overseas as they try to shelter their cash from HMRC
Investors are ploughing record-breaking amounts into foreign bonds as they seek to lower their tax bills.
Financial advisers said that Ireland, Luxembourg and the Isle of Man were among the most popular jurisdictions for buying bonds because they offer significant tax advantages.
Some £10.5 billion was placed in offshore bonds in the 12 months to the end of June, more than double the £5.1 billion from the previous year, according to data reviewed by the Financial Times.
The trend is being driven by the barrage of tax threats that high earners are facing, including frozen income tax thresholds and Isa allowances and higher capital gains tax rates. Some pension pots will also be subject to inheritance tax from 2027.
• Income tax raid could cost higher earners £754 a year
Capital gains tax (CGT) for those in higher and additional rate income bands went from 20 per cent to 24 per cent in the last budget. The tax-free CGT allowance has also dropped from £12,300 to £3,000 over the past two tax years.
The anticipation of further taxes in the budget on November 26, aimed at those with the “broadest shoulders” is partly driving the trend, according to Claire Trott from the wealth manager St James’s Place.
Trott said: “Some investors may be concerned about potential tax increases in the UK, as offshore bond funds allow tax to be deferred while the investment remains within the bond. For others, it may reflect plans to relocate overseas.”
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Offshore bonds offer tax deferral, meaning you only pay tax when you take the money out of the bond. The investment wrapper is legally structured as a life insurance policy, allowing you to invest income and accrue gains without immediately paying tax.
You can withdraw 5 per cent of the investment every year for 20 years, tax-free.
When you finally withdraw all the money, or more than 5 per cent, it will be subject to income tax at your marginal rate. This can be helpful for those who want the money for retirement, when their income tax rate is likely to be lower than it is when they are earning.
• I’m buying a house with my daughter. Will it land her with a big tax bill?
Offshore bonds can also serve as a tax-efficient way to pass down wealth, for example to grandchildren who have little or no income and so will pay less tax on the investment.
Helen McGhee from the London law firm Joseph Hage Aaronson & Bremen said that while offshore bonds were becoming popular, they weren’t for everyone because the rules were complicated — and the tax office had them in its sights.
“Offshore bonds are being heavily marketed by some firms, but investors should be cautious. In most cases they do not reduce tax payable; they defer it, and the deferral objective can be compromised in some circumstances.
“HM Revenue & Customs’ Personal Portfolio Bond legislation can trigger an earlier than envisaged tax bill, which could wipe out the expected benefit. Equally, with increasing popularity comes increasing attention from HMRC.”
Summary of facts
The Claimant, Hotelbeds UK Limited (“Hotelbeds”) is a business which purchases hotel accommodation from UK VAT registered hotels and sells this to other suppliers of hotel accommodation (self-described as a “bed-bank”) for onward distribution.
Hotelbeds made standard rated supplies of hotel accommodation to its business customers and paid VAT on the purchase of hotel rooms from its suppliers. Under normal VAT principles Hotelbeds could deduct the input tax paid on the purchase of hotel rooms. However, Hotelbeds had difficulties obtaining VAT invoices from its suppliers to support its input tax deductions.
Hotelbeds’ practice (in accordance with the industry norm) was to pay for hotel rooms by means of a virtual credit card when the hotel guest checked in or checked out of the hotel (not following issue of a VAT invoice by its suppliers). Despite the suppliers being legally obliged to issue a VAT invoice, this was rarely done in practice. It was not disputed that Hotelbeds made some efforts to obtain the VAT invoices from its suppliers, but HMRC’s position was that Hotelbeds could have tried harder to obtain the VAT invoices but did not.
Hotelbeds submitted two Error Correction Notices (“ECNs”) to HMRC to recover the input tax, but the ECNs were rejected by HMRC on the basis that Hotelbeds had “systematically failed” to obtain valid VAT invoices. This was despite HMRC making input tax repayments in relation to two ECNs submitted for earlier VAT periods on the same facts.
Under Regulation 29 Value Added Tax Regulations 1995, HMRC has a discretion to allow claims for input tax which are not supported by a valid VAT invoice where the taxpayer holds other evidence of the VAT charge. Hotelbeds relied on three policy documents published by HMRC which deal with the application of HMRC’s discretion: VIT31200; HMRC’s Statement of Practice dated March 2007 (the “SOP”); and VAT Notice 700.
Hotelbeds particularly relied on VIT31200 which stated, “where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction.”
Hotelbeds brought a judicial review claim against HMRC on the basis that HMRC’s refusals to allow the deductions was unlawful because i) HMRC failed to apply their own guidance, ii) alternatively, it had a “legitimate expectation” that it would be entitled to deduct input tax based on statements in HMRC’s guidance; the SOP; and / or because HMRC accepted two earlier ECNs on the same facts, and iii) the HMRC
decision was “irrational” given that there was sufficient evidence of the relevant supplies.
What did the Court decide?
The Court determined that none of the three HMRC policy documents were drafted with a “no invoice” situation in mind. Instead, they each make references to circumstances where a taxpayer has an “invalid invoice” which did not apply in this case. Therefore, given the absence of any directly applicable policy the Court determined that, “the [HMRC] decision maker was required to go back to the scope of the discretion and to judge the request made against the principles of the tax and HMRC’s duty to protect the revenue.”
The Court concluded that:
· HMRC’s guidance was “inconsistent, ambiguous and, in [the Court’s] judgment, difficult for a decision-maker to navigate.”
· In relying upon the written policy contained in VAT Notice 700 HMRC has misconstrued and/or misapplied its own policy.
· The strong driver against recovery without a valid invoice is fraud but there was no real risk of fraud in this case
· The Court did not agree with HMRC that a “systematic” failure to obtain VAT invoices meant simply a “repeated” failure.
· The Court held that HMRC’s decision “erred in law” because it “failed to take the principles of neutrality and the right to deduct properly into account.”
· HMRC’s refusal was inconsistent with the payment of earlier ECNs and was “unfair and unreasonable, and unsustainable in public law terms.”
On that basis Hotelbeds’ application for judicial review was allowed. The Court did not consider it necessary to deal with Hotelbeds’ “legitimate expectation” argument because Hotelbeds succeeded on its main argument.
Comment
Hotelbeds main argument was that HMRC had not followed its own guidance. However, HMRC’s guidance is not law, rather it contains HMRC’s interpretation of the law and how the law should be applied. It is not unknown for HMRC to take a position which is contrary to its own guidance.
Unfortunately the Court did not rule expressly on the legitimate expectation argument, which put on the wider basis obliges HMRC as a matter of public law to exercise a discretion in a manner that is consistent with its “acknowledged duty to act fairly and in accordance with the highest public standards.”- per Sir Thomas Bingham MR in Unilever
(1996) STC 681), albeit it might well have reached the same decision. Whilst acknowledging the centrality of the invoice to the VAT system, this case involved similar claims from the Claimant being accepted in the past, HMRC being in a net positive position as regards the tax it received – contrary to the “adventitious windfall” in Unilever – here there was adequate evidence of the transactions in question, no risk of fraud and no risk of the issue continuing in future periods owing to a change of system. It is difficult to see how an HMRC officer properly instructed as to the true scope of the discretion could have reached the same decision rationally.
New residence-based tax regime: FA 2025 fundamentally changed the UK tax regime for individuals formerly known as non-UK doms. The legislation enacting the various changes is extremely complex and, given the time pressure for enactment, inevitably littered with technical anomalies. Some tweaks have emerged in the L-Day papers published yesterday, albeit we are reading from the Parliamentary Statement rather than draft legislation. We understand that:
· The inheritance tax spousal election for non-long term UK resident spouses (i.e. those who are not within the scope of worldwide IHT) to benefit from the full spousal exemption where the spouse that has died was a long-term UK resident (thus within the scope of worldwide IHT). The legislation will be amended so the election lapses, as intended, after ten consecutive years of non-residence.
· The Temporary Repatriation Facility was extended to income and gains pools with respect to trusts that were previously settled overseas and had become UK resident (referred to in the legislation as migrant settlements). Amendments will be enacted to ensure that the legislation works as intended for offshore income gains and migrant settlements.
We are still awaiting further detail beyond what was announced yesterday in this space. Some dramatic U-turns would be most welcome!
Offshore anti-avoidance provisions: No consultation document on the offshore anti-avoidance provisions has emerged yet but a summary of responses was published this week, and further consultation will follow. An update is expected in the Autumn Budget 2025 and any changes to the legislation are not now expected to be in place before 2027/28.
In other measures: We also know that ITEPA 2003 s 690 (internationally mobile employees: where PAYE is operated on only the proportion of the employees’ income that relates to UK duties) will be amended so that the present concessionary inclusion of treaty non-residence will be included within the legislation.
In the world of APR/BPR, there were no fundamental changes to what was announced at Autumn Budget 2024 but it was announced that IHT can be paid by ten interest free equal annual instalments where the property qualifies for either APR and/or BPR. In addition:
· The draft legislation makes provision for the £1m 100% relief allowance to increase in line with indexation – by reference to the consumer price index – from 6 April 2030.
· As with the nil rate band, the 100% relief allowance for individuals is refreshed every seven years.
· For relevant property trusts, the 100% trust relief allowance refreshes after each ten-year anniversary. IHTA 1984 s 69 is amended so that all relevant property trust exit charges are calculated based on the value of trust property before APR and/or BPR regardless of whether the exit takes place before or after the first ten-year anniversary.
· Anti-fragmentation rules will mean that, for trusts created on or after 30 October 2024, the £1m allowance will be divided up between trusts created on or after 30 October 2024 by the same settlor (as per IHTA 1984 new s 124F).
· IHTA 1984 s 131 (relief for transfers within seven years of death) is to be amended such that where the market value of property has fallen between the time of a lifetime gift and death, the lower value is automatically taken into account.
IHT and pensions: The draft legislation for the IHT pension changes effective from 6 April 2027 was published along with a response to the technical consultation.
· Personal representatives and not pension scheme administrators will be responsible for reporting and paying the IHT on any unused pension funds and death benefits from 6 April 2027. HMRC will continue to work with industry experts to develop and refine how the process will work with a view to addressing issues the PRs will face.
· Death in service benefits payable from registered pension schemes should not be within the scope of IHT.
Original article can be found here: Legislation Day 2025: Private Client Perspective (taxjournal.com)
SUMMARY
In Standish v Standish [2025] UKSC 26, the Supreme Court has unanimously upheld the decision from the Court of Appeal that the transfer of pre-marital assets for the purpose of inheritance tax planning did not matrimonialise those assets and that the sharing principle should not apply.
The key takeaways from the judgment are:
· Non matrimonial assets are definitively off the table for the purposes of the sharing principle.
· When determining matrimonial property, it is the source not the title of the asset that is important.
· Pre-marital assets can be matrimonialised where the spouses have been treating those assets as shared over time.
· Transferring assets to one’s spouse for the purposes of tax/business planning is not determinative of those assets being treated as shared.
BACKGROUND FACTS
Standish v Standish focuses on the transfer of c.£80m of assets from Husband to Wife in 2017. This transfer was part of a tax planning exercise to take advantage of Wife’s non-dom status in the UK. The intention was for her to establish offshore trusts for the benefit of their children with those assets.
These assets derived from the Husband’s pre-martial wealth, generated throughout his successful career in the financial services industry from which he retired in 2007, having married in 2005.
CASE LAW
There are three principles established by case law which are applicable to financial remedy proceedings; the Needs Principle, the Compensation Principle and the Sharing Principle.
The Needs and Compensation principles were not addressed in this judgment, however we mention for completeness as non-matrimonial assets may still be awarded under these principles. The Needs Principle looks at the financial needs of each party in the foreseeable future and the Compensation Principle looks at “relationship-generated disadvantage”, such as giving up a career to bring up children.
The Sharing Principle was established in White v White [2001] 1 AC 596, a landmark case which changed the landscape of settlements under divorce. It levelled the playing field between the “bread-maker” and the “home-maker”, treating both parties as equally entitled to wealth generated throughout the marriage.
In Miller v Miller; McFarlane v McFarlane [2006] UKHL24, the court held that only matrimonial property should be subject to the sharing principle. Matrimonial property is a term applied typically to assets that are earned or gained during the course of the marriage. Conversely, non-matrimonial property typically applies to assets which were held prior to the marriage or acquired by way of gift/inheritance.
The concept of matrimonialisation was coined by Roberts J in WX v HX [2021] EWHC 24, to describe the circumstance whereby non-matrimonial assets become matrimonial assets. While this had been explored previously, in K v L [2011] EWCA Civ 550, Wilson LJ sought to lay guidelines as to the situations where this may occur as follows:
1. Where the relevant assets cease to be of significant value in relation to matrimonial property.
2. Where the relevant assets are mixed in with matrimonial property and it is accepted that the contributing spouse would view those assets as matrimonial property.
3. Where the contributing spouse has chosen to invest the assets in the matrimonial home.
The Supreme Court looked to these historic cases in its judgment.
THE JUDGMENT
The essential question considered in the Supreme Court was whether the 2017 assets were matrimonial property and so subject to the Sharing Principle. The Supreme Court took the opportunity, to the delight of private client practitioners, to explicitly confirm what was already widely understood that the Sharing Principle should only apply to matrimonial assets. The judgment reads; ‘the time has come to make clear that non-matrimonial property should not be subject to the sharing principle’.
The Supreme Court upheld the Court of Appeal’s assessment that 25% of the £80m comprised matrimonial property however disagreed with the basis on which it had not been matrimonialised. The Court of Appeal had looked to the list provided in K v L and on the basis that none of the scenarios described were applicable here the Court ruled that the assets had not become matrimonial property. The Supreme Court stated that the list was not intended to be exclusive and provided a broader explanation of the term: ‘what is important (….) is to consider how the parties have been dealing with the asset and whether this shows that, over time, they have been treating the asset as
shared between them. That is, matrimonialisation rests on the parties, over time, treating the asset as shared.’
The Wife contended that by virtue of the 2017 transfer, the assets had been shared between her and her husband however the Supreme Court ruled that the intention was clearly to save tax and that a benefit to the family is not synonymous with a shared benefit between the spouses. Whoever has the title to property is not determinative in the matrimonial character of that property.
The recent Court of Appeal judgment in Haworth & Ors v The Commissioners for His Majesty’s Revenue and Customs [2025] EWCA Civ 822 has confirmed that an appropriately broad test should be used for the purpose of establishing the place of effective management (“POEM”) of a trust as required by many double tax treaties, confirming that the central management and control test (“CMC”) set out in Wood v Holden (Inspector of Taxes) [2006] EWCA Civ 26, [2006] 1 W.L.R. 1393 does not apply to trusts. While the decision relates to the interpretation of the Double Taxation Treaty (“DTT”) as between the United Kingdom and Mauritius, it may be used by HMRC going forward to determine the POEM of trusts for the purposes of other DTTs as well as for companies and partnerships seeking to rely on DTTs based on the OECD Model Tax Convention (the “Model Convention”). In light of such far-reaching implications, this article details the Court of Appeal’s judgment.
Case Overview
In Haworth the appellants were settlors of three family trusts, appealing the Upper Tribunal’s decision that they were liable to UK capital gains tax (“CGT”) on the disposal of company shares held by the trusts (under s2 TCGA 1992). On the basis that Mauritius did not charge tax on such gains, the appellants’ tax advisers considered that CGT could be avoided through the UK-Mauritius DTT (Art 13) if UK resident trustees (determined under s69 TCGA 1992) were appointed (avoiding any s86 TCGA 1992 settlor attributed gains) in the same year as the Mauritius resident trustees but after the share disposal and a CMC Wood v Holden approach was followed in determining where Article 4(3) POEM attributable primary taxing rights fell.
The appellants argued that the POEM of the trusts was the place in which the relevant decisions were made by their trustees (unless there was any element of “rubber stamping” involved in the decision-making process).
On 1 July 2025, the Court of Appeal rejected this submission and dismissed the appeal. There was some useful and interesting discussion around the interpretation of DTTs.
DTT Interpretation
Newey LJ confirmed that DTTs are not unilateral agreements such that the principles of interpretation followed by one contracting state could be presumed to automatically apply. Instead the role of the court is to establish, by objective and rational means, the common intention which can be ascribed to the two contracting states.
As the UK-Mauritius DTT was based on the OECD Model Convention there was a review of the applicable commentary around determining the meaning of POEM under Article 4(3) including commentary which post-dated the signing of the relevant DTT. The commentary on Article 4(3) stated that an entity may have more than one place of management, but it can have only one place of effective management at any one time.
Unlike in relation to a corporate, Newey LJ was keen to establish that a trust’s CMC can potentially, be in more than one place and this meant the concept of CMC was not well-suited to perform the function of a DTT POEM test.
Crucially with respect to the particular facts of the Haworth case, it was also legitimate to have regard to the circumstances in which trustees from a particular jurisdiction were appointed.
The case places particular emphasis on the pre-determined plan/ preordained decision making which led to the trustees’ appointment and as such the POEM was in the UK. It was also noted that the location of the trust’s professional advisers will not determine the POEM of the trust (it is not the advice that is relevant but rather who decides to follow that advice) and the POEM should not be determined only by reference to the circumstances at the “moment of disposal”.
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On 19 March 2019 the Court of Appeal handed down its judgment in Christianuyi Limited & Others v HMRC [2019] EWCA 474 (Civ). The Court of Appeal upheld the decision of the Upper Tribunal (“UT”) that the Managed Service Company (“MSC”) legislation, contained in Chapter 9 Part 2 of the Income Tax (Pensions and Earnings) Act 2003 (“ITEPA”), applies to personal service companies (“PSCs”) who engage accountancy service providers.
HMRC has recently increased enforcement in this area and this insight revisits the background to Christianuyi. For an analysis of the MSC legislation see this article.
The appellants were all PSCs which were each set up by a company called Costelloe Business Services Ltd (“Costelloe”). The PSCs paid Costelloe a fee for a “standardised package of services” which Costelloe called its “Gold Business Service” (“GBS”). The GBS product included: a) providing a registered office for the PSC; b) dealing with invoicing; c) managing payroll; and d) preparing and filing annual company accounts and returns and paying Corporation Tax to HMRC.
The PSCs contracted with end clients to provide the services of an individual and charged clients fees for those services. The PSCs almost always paid the individual a combination of minimum wage salary and dividends. This resulted in higher net pay for the individual than if the payment had been treated as employment income and subject to PAYE and National Insurance Contributions (“NICs”) on the whole amount.
If the MSC legislation applies, then all payments to the individual are treated as employment income and taxed as if the individual was employed by the PSC.
The FTT
In the FTT the appellants conceded that Costello was an “MSC provider” within the meaning of section 61B(1)(d) ITEPA but maintained that Costelloe was not “involved with” the appellants within the meaning of section 61B(2) ITEPA. It was common ground between the appellants and HMRC that the other MSC requirements in section 61B(1) ITEPA were satisfied, and the appellants did not argue that the exemptions in section 61B(3) and (4) ITEPA applied.
The FTT held that Costelloe was “involved with” the appellants and dismissed the appeals on the basis that:
· Costelloe benefitted financially on an ongoing basis from the provision of the services of the individual (section 61B(2)(a) ITEPA) because: 1) Costelloe charged a percentage fee linked to payments which the PSC received; and 2) Costelloe collected interest on tax amounts deposited in separate bank accounts by Costelloe;
· Costelloe influenced or controlled the way payments to the individual were made (section 61B(2)(c) because Costelloe decided the level of salary and dividends paid to the individuals; and
· Costelloe influenced or controlled the PSC’s finances or any of its activities (section 61B(2)(d)) because: 1) Costelloe influenced which bank account the appellants used; 2) made tax deductions and collected interest on those amounts in a separate bank account; and 3) for certain periods withdrew amounts from the appellants’ accounts without proper authority.
The UT
The arguments in the UT concerned in summary: a) whether parliamentary material could be used as an aid to statutory construction; b) whether the appellants should be granted permission to resile from their admission before the FTT that Costelloe was an “MSC provider”; and c) whether Costelloe was “involved” with the appellants within the meaning of section 61B(2)(a), (c) or (d) ITEPA.
The UT held that Costelloe was “involved” with the appellants and that it was an “MSC provider” (despite granting permission for the appellants to withdraw their admission on that issue in the FTT).
The UT interpreted some parts of the MSC legislation more widely than the FTT. In particular the UT held at [81] that section 61B(2)(a) ITEPA did not require “any form of correlation or relationship between the amounts earned by the individual and the extent of the financial benefit received by the MSC provider. As long as there is a causal link between the two, the fact that one may fluctuate whilst the other does not is nothing to the point - it is a wholly irrelevant factor.” On that basis, section 61B(2)(a) would appear to be satisfied if the MSCP receives any payment from the PSC for its services which it is expected would be a factor in nearly all professional arrangements.
The Court of Appeal
By the time the case reached the Court of Appeal, the issues in dispute had been narrowed significantly. There was no argument as to whether Costelloe was “involved” with the appellants under section 61B(2) ITEPA. The only argument before the Court of Appeal concerned the interpretation of section 61B(1)(d). This argument was ultimately unsuccessful, and the taxpayers’ appeals were dismissed.
In 2007 the Managed Service Company (“MSC”) legislation, contained in Chapter 9 Part 2 of the Income Tax (Pensions and Earnings) Act 2003 (“ITEPA”), came into force.
Despite the legislation now being almost two decades old, HMRC enforcement in this area has increased in recent years. HMRC were successful in the Court of Appeal in Christianuyi Limited & Others v HMRC [2019] EWCA 474 (Civ) (“Christianuyi”) which confirmed that the MSC legislation could apply to personal service companies (“PSCs”) who engage accountancy service providers. For a summary of Christianuyi see this article.
Following Christianuyi, HMRC has been specifically targeting specialist accountancy service providers who provide accountancy advice to contractors on the basis that those businesses: (a) are Managed Service Company Providers (“MSCPs”), and (b) their PSC clients are MSCs. There are currently proceedings going through the First Tier Tax Tribunal to decide how the rules apply to those businesses. Depending on how the proceedings are decided, many more businesses could be issued with HMRC enquiry notices and significant tax assessments.
Businesses which advise and engage with PSCs should seek appropriate legal advice on their business practices now.
Directors and ex-directors of potential MSCPs should also obtain advice on their position as the tax debt of the PSCs can potentially be transferred to them personally for periods during which they were a director or “associate” of the MSCP.
Section 61B(1) ITEPA states that a “Managed Service Company” is a company which: (i) provides the services of an individual to others; (ii) pays that individual all or most of the fees it charges to those others; (iii) pays the individual in a way which increases the net amount received by the individual, as compared with what he would have received net if he had earned the fees as his employment income; and (iv) involves an MSCP in its business in one of the ways set out in section 61B(2) ITEPA.
All four MSC conditions must be met for the MSC legislation to apply.
If the PSC is deemed to be an MSC then all payments to the individual are treated as employment income and taxed as if the individual was employed by the MSC (so subject to PAYE and National Insurance Contributions on the full amount).
An MSCP is “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals,” (section 61B(1)(d) ITEPA).
HMRC considers “promotion” to mean promoting or marketing the use of PSCs, and “facilitation” to mean “helping, making easier, enabling” (see HMRC Employment Status Manual: ESM3515 - Managed Service Companies (MSC): MSC Providers).
An MSCP is “involved with the company” (i.e. the PSC) if the MSCP or an associate of the MSCP:
· benefits financially on an ongoing basis from the provision of the services of the individual (section 61B(2)(a) ITEPA);
· influences or controls the provision of those services (section 61B(2)(b) ITEPA);
· influences or controls the way in which payments to the individual (or associates of the individual) are made (section 61B(2)(c) ITEPA);
· influences or controls the company's finances or any of its activities (section 61B(2)(d) ITEPA); or
· gives or promotes an undertaking to make good any tax loss (section 61B(2)(e) ITEPA).
Only one of the above conditions needs to be met for this section to apply.
HMRC’s position (see HMRC’s spotlight 67 on MSCs) is that the first condition is met if the alleged MSCP charges any fee for its services. It is expected that this would be a relevant factor in almost every professional arrangement.
There are two exemptions to the application of the MSC legislation:
1. Under section 61B(3) ITEPA a person does not fall within section 61B(1)(d) “merely by virtue of providing legal or accountancy services in a professional capacity.” This is aimed at preventing accountants and legal advisors who advise PSCs from being caught by the legislation; and
2. Section 61B(4) ITEPA contains an exemption for staffing businesses. For example, an employment business or agency undertaking its core business of placing work seekers (including those operating through companies) with end clients.
In broad terms, the PSC bears the risk and is responsible for paying the tax. However, under the transfer of debt regulations which apply to MSC arrangements (section 688A,
Part 11, ITEPA), if HMRC cannot recover the tax from the PSC then it can apply to transfer the debt to:
· The director, or other office holder or associate of the PSC;
· The MSCP or the director, or office holder or associate of the MSCP; or
· Any other person who directly or indirectly has encouraged or been actively involved in the provision by the PSC of the services of the individual, or a director, or other office holder or associate of such a person.
The MSCP is likely to have deeper pockets than the PSC which may not have any assets or hold any funds, or which may have been dissolved. Therefore, the MSCP faces a significant risk of the debt being transferred to the company or its directors if the PSCs are found liable for the tax.
There are strict time limits within which a transfer of debt notice must be issued by HMRC to the MSCP, and there is a right of appeal against such a notice.
