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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.

Summary of the background

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.

What did the courts decide?

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.

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Introduction

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.

What is a Managed Service Company?

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).

What is a Managed Service Company Provider?

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.

Exemptions

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.

Who is liable?

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.

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In his speech delivered on 11 March 2025 at the Chartered Institute of Taxation, James Murray, Exchequer Secretary to the Treasury, announced plans for HMRC to introduce a new whistleblowing scheme. The new scheme will take inspiration from the US and Canadian whistleblowing schemes which substantially reward informants for providing information to tax authorities on tax non-compliance.

The new scheme follows the measures outlined in the Chancellor’s Autumn Budget to “close the tax gap,” and is aimed at tackling “serious non-compliance in large corporates, wealthy individuals, offshore and avoidance schemes.” The scope of the scheme has not been confirmed but given the reference to “avoidance schemes” it is not expected to be limited to reports of tax evasion but also “serious” tax avoidance.

How does HMRC’s current rewards scheme work?

The new scheme is intended to complement HMRC’s current rewards scheme (contained in section 26 of the Commissioners for Revenue and Customs Act 2005) which rewards informants on a “discretionary” basis rather than as a percentage of the tax recovered (and so currently in the UK there is actually no guarantee that an informant would receive any reward for providing information to HMRC).

Rewards under HMRC’s current scheme are relatively modest and not linked to the amounts recovered. Therefore, it is unlikely that money is currently the main incentive for informants to approach HMRC (and the scheme is not widely publicised in any case). In 2023 – 24 HMRC reportedly paid out nearly £1m in awards (the highest payout in recent years). However, in comparison, in the same year the Inland Revenue Service (“IRS”) paid out a total of $88.8m across 121 awards in respect of recoveries totalling $338m.

How might the new scheme work?

Details of the new scheme have not been confirmed but, if the UK followed the US model, then rewards for whistleblowers could be between 15 – 30% of the sums collected (which includes tax, interest, penalties and fines). Whistleblowers in Canada receive less (5 – 15%). The payments are potentially very large sums, and it marks a significant change in practice for HMRC in tackling tax non-compliance.  

In the US, the IRS has a dedicated Whistleblower Office which processes information relating to whistleblowing claims. Whistleblowers in the US will qualify for awards for providing “specific” and “credible” information to the IRS regarding tax underpayments or violations that lead to proceeds being collected.  

Informants making claims are required to provide the following information to the IRS to support their claim:

• A description of the alleged tax non-compliance and supporting evidence (and a description of documents or evidence not in the whistleblower’s possession or control);  

• An explanation of how and when the whistleblower became aware of the information;

• A description of the whistleblower's relationship to the relevant party (for example, family member, client, employee etc); and

• A signed declaration under penalty of perjury if false information is provided.  

There are certain “ineligible” whistleblowers who cannot make claims, mainly individuals reporting on non-compliance linked to their roles in the federal government.

In order to qualify for a tax-geared award the information provided must relate to a claim exceeding $2,000,000 or, if the subject of the claim is an individual, the individual’s gross income for the relevant tax year must exceed $200,000 (the Canadian thresholds are less). If the claim does not meet the criteria for a tax-geared award, then the IRS can instead pay awards as part of discretionary programme. It might be anticipated that the UK government will include similar minimum thresholds in order to reduce time and cost spent pursuing smaller claims.

Notably awards can be decreased for claims based on information obtained from public sources or if the whistleblower “planned and initiated” actions which led to the non-compliance. Again, it is expected that a similar provision would be included in the UK rules to prevent, for example, individuals involved in planning and procuring tax avoidance schemes from receiving substantial awards.

Conclusion

It remains to be seen how the new UK whistleblowing scheme will work in practice, however, some early observations can be made at this stage:

1. Under the new UK scheme, whistleblowing will become a much more attractive option given the powerful financial incentives for informants. In essence, people are being encouraged to whistleblow. Even if the information supplied does not directly lead to a tax recovery, it (the information) will presumably potentially sit on HMRC’s Connect system. It is assumed that there will need to be systems in place to separate reports of genuine tax non-compliance from opportunistic informants providing misleading information to HMRC;

2. Dealing with more claims will require significant resource allocation from HMRC, but also from businesses and individuals who are the subject of allegations;

3. Due to the nature of the information provided, reports are more likely to be made by individuals close to the taxpayer or employed by them. Businesses should be aware of the protections afforded to whistleblowers by the law; and

4. Information obtained from whistleblowers by HMRC can be shared with different Government departments (subject to relevant information gateways), including, for example, the Serious Fraud Office, the Police (in some circumstances) and the Financial Conduct Authority.

The details of the new scheme are not yet available but there is clearly a potential for a significant change in tax compliance work. All of the information supplied to HMRC is likely to involve a breach of confidence of some nature. Some of the information supplied will be accurate, but it is likely that some of the information supplied will be inaccurate or incomplete. Both types of information may have consequences for the taxpayer.

A further note will be produced when details of the new scheme are published.

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