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.
