Court of Appeal confirms Costelloe is an MSC Provider

As highlighted alongside our newsletter last week, the Court of Appeal has handed down it’s judgment in the case of Christianuyi Limited & Others v HM Revenue & Customs.

There is some significance to this case, because – despite the fact that the rules have been around for some 12 years – it remains the first and only decided case on the Managed Service Companies (“MSC”) legislation.  Beyond that, however, the judgment offers little additional guidance on the boundary lines of the MSC rules, and in particular their application to those providing accountancy services to PSCs.

As most clients will be aware, the MSC rules are notorious due to the fact that they are drafted expansively and they also include the widest debt transfer provisions of any piece of tax legislation.

The Christianuyi case concerned whether Costelloe Business Services Ltd (“Costelloe”), a business which formed around 1000 Personal Service Companies (“PSCs”) and provided them with a package of accountancy and ancillary services, was an MSC Provider as defined by the legislation, and whether it was “involved with” those PSCs.

An MSC Provider is a company that is in the business of promoting or facilitating the use of companies to provide the services of individuals. The legislation provides that businesses which are merely providing legal or accounting services in a professional capacity, or which are merely placing people, are not MSC Providers.

Appeals by Christianuyi Limited and four other PSCs were taken as informal test cases, but the application of the decision will almost certainly apply to all the PSCs to which Costelloe provided its services.

We previously reported in detail on the decision in the First-tier Tribunal, and also the unsuccessful appeals to the Upper-tier Tribunal, and these reports precis the important features of the relationship between Costelloe and its clients and explain how the legislation works.

In summary however, Costelloe provided a standardised product to clients, and did not have meaningful discussions with its clients about its services or the salary levels the individuals would be drawing.  False minutes of meetings declaring dividends were produced, and genuine instructions from clients were rarely taken as to levels of dividend payments.

Costelloe was involved in facilitating the banking arrangements of its clients (from which it drew its fees and paid HMRC on its clients’ behalf), and, notably, from which Costelloe covertly earned and retained interest of several thousands of pounds.

In the circumstances it was conceded by the Appellants that Costelloe was an MSC Provider, but they argued that Costelloe had no involvement with their PSCs and therefore, the rules did not apply. This argument was lost in the First-tier Tribunal.  In the Upper-tier Tribunal the Appellants were allowed to reinstate the argument that Costelloe was not an MSC Provider. However, that argument was also lost.

The case came before the Court of Appeal on the narrow technical ground that whilst Costelloe may have been in the business of promoting or facilitating the use of companies, it was not promoting or facilitating the services provided by those companies – and this was required for the MSC rules to apply. This argument was roundly rejected and the Court of Appeal found that Costelloe was “…undoubtedly an MSC Provider…”.

Many Accountancy Service Providers have taken a keen interest in this case, as it could be taken to suggest that many of their businesses are at risk of being inadvertently caught up by the rules. Coupled with the draconian debt transfer provisions, this represents a major concern.

However, it is important to take this case in context and to remember that the appellants had conceded that Costelloe was an MSC Provider prior to the First-tier Tribunal deciding the appeals, and that the ‘accountancy exemption’ was not argued. This is perhaps unsurprising as the facts in these appeals are fairly extreme and unlikely to be representative of most Accountancy Service Providers.

This point was touched upon in the Upper-tier Tribunal judgment; however, the judges declined to comment on the application of the legislation to other ‘facilitators’ of PSCs – for example payroll service providers – and left the matter as an open question. There were perhaps a few crumbs of comfort in the Court of Appeal’s judgment whereby it was acknowledged that there was a boundary between MSC Providers as targeted by the rules and businesses providing professional or other support services to customers who happen to be PSCs. The Court of Appeal observed:

“An accountant or other support service will not be caught even if some of its customers are PSCs because although in a broad sense it might be regarded as facilitating those PSCs in the running of their business, that assistance is merely a consequence of the services it provides, it is not in the business of doing that.”

As to whether a particular service provider will be able to draw the distinction between facilitating PSCs as a mere consequence of its business or as the substance of its business, will be an argument for another day in another case.

Of greater significance than this judgment itself is how HMRC now pursue the liabilities in these five cases. The First-tier Tribunal found as a fact that the individuals were either advised or even required by an end client to use a PSC, and had been referred by agencies to Costelloe.  As the MSC debt transfer rules are widely drafted, they impose liability on the MSC Provider and anybody who has encouraged or has been actively involved in the use of the MSC Provider, end clients and potentially the referring agencies are in the firing line.

Companies House latest records show that of the five companies involved in these appeals, two have applied to be struck off, one has been struck off and reinstated, one has net assets of just £7 and another has minimal cash assets. It appears highly likely that debt transfer proceedings will follow the conclusion of these appeals.

For advice on the application of the MSC legislation and exposure to the debt transfer provisions, as well as due diligence measures that can be taken by agencies and clients, contact the Chartergates MSC advisory team on 01908 533255.

Published: 04.10.19 - Posted In: Uncategorized