The case of Christianuyi Ltd & Ors v Revenue & Customs is a landmark case as it is the first case heard on the Managed Service Company (MSC) legislation. The judgment also refers to additional MSC litigation pending and that HMRC are taking another case seeking to transfer the income tax and NIC liability from the individual taxpayers to the MSC provider. The First-tier Tribunal (FTT) rejected the appeal by the contractors that their companies and earnings were not controlled by MSC provider CBS during the 2007/8 and 2009/10 tax years and so were not caught by the MSC legislation.
The MSC legislation was introduced in April 2007 to target ‘composite’ companies (and also, to a lesser extent, Personal Service Companies (PSCs) where the PSC had handed control of the company to a third party provider).
A composite company is one which is set up and run by a provider and of which the contractors are all shareholders, normally holding different share classes. The point of a composite company, before the MSC legislation, was to facilitate contractors being able to receive dividends instead of trading income but without having to set up an individual PSC.
In this case, all five appellants were shareholders in a composite company pre April 2007. In light of the pending changes, the provider, CBS, wrote to all shareholders offering a change from the composite structure to individual Personal Service Companies but with a high degree of administration services outsourced to CBS.
As mentioned above, the MSC legislation can also catch PSCs where control is ceded to a provider and it was on this point that the case turned. More specifically, the question before the Tribunal was whether the MSC provider (CBS) was ‘involved’ with the company either:
If any of these were answered in the affirmative, then the PSCs would be caught by the MSC legislation.
The judgment contains very detailed findings of fact and has particular focus around the banking arrangements put in place by CBS to pay money to and from the PSCs.
In the end, the FTT held that CBS did benefit on an ongoing basis from the contractors’ activities simply as a result of how CBS charged their fees; they found there was a strong nexus between their fees and the individuals’ activities.
It also held that CBS decided the amount of the dividend paid at year end and so influenced the payments to the contractor from the PSC.
Finally, the FTT found that CBS did influence the PSC’s finances as it deducted taxes on an arising basis (i.e. well before the statutory payment dates) and had direct access to the PSC's bank accounts without the bank holding authority from the contractor.
Consequently, it was found that the PSCs were caught by the MSC legislation and so dividends paid by the PSC fell to be treated as employment income and subject to income tax and National Insurance (NIC) accordingly.
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