Contractors, Self-employment and HMRC Spotlight 32

HMRC has been publicising its win in Christianuyi Ltd & Ors – a tax tribunal case focusing on false self-employment and Managed Service Companies. The case is the first major victory HMRC has achieved under the “IR35” legislation and if HMRC’s “Spotlight” article on the subject is anything to go by, will be the first of many such cases.

The judgment from the Tribunal goes into some detail as to definitions of Managed Service Companies, MSC “providers” etc. under the law. The MSC Provider in Christianuyi was Costelloe Business Services Limited, part of a wider group of companies

There are a number of interesting points to be drawn from the judgment, a few of which are:

  1. Apparent flaws in the structure of the MSC scheme offered
  2. The MSC Provider’s handling of the case and dealings with HMRC
  3. Who is now liable for outstanding tax/NI

Flaws in the structure

The key to HMRC’s case was that the appellants were not genuinely self-employed, instead using limited companies to reduce their tax/NI liability (and that of the end users of their work).

The usual tests for self-employment (risk/reward, control and supervision etc.) were relevant here amongst other things.

Many things undermined the assertion of genuine self-employment. Amongst them was the fact the appellants did not truly direct their companies and in some cases do not seem to have understood basic Company law, for example;

  • One appellant stated he did not understand dividends;
  • One appellant “Director” said that he had never attended any Board meetings.

More technically, how the MSC Provider was taking its “professional fees” for running the companies and how salary/dividend payments were made undermined the structure.

MSC Provider’s Response

Reading the latter part of the judgment, it is difficult not to form a poor impression of how the MSC Provider and its Directors responded to HMRC’s investigation of their “clients”.

The Tribunal described one Director as “evasive and lacking credibility” and that he “played with words in an obstructive manner”.

Who is liable?

Currently, the five appellants in Christianuyi together owe over £150,000 in tax and National Insurance for the three tax years under consideration.

HMRC have separately begun proceedings to transfer this debt from the appellants to the MSC Provider.

There is also the potential in the legislation to transfer the debts elsewhere in the contractual chain.

What this means

Limited Company contractors, as well as those who use their services, need to review their position carefully.

There are many legitimately self-employed people who run their own limited company business.   They need to make sure they are not at risk. Self-employed workers who are offered “service companies” should think very carefully before agreeing to be part of such a structure.

It is possible that end users of “failed” structures like this could be exposed to tax/NI costs and they should be aware of this risk.

Finally, though it should go without saying, all parties need to be sure that they can rely on the integrity of their service providers and professional advisors.