Welcome to Contractor Corner, the series written specifically by Qdos Contractor for accountants with clients who are contractors
As if IR35 reform was not enough, HMRC resurrect the MSC legislation
A recent Tribunal case involving Costelloe Business Services (CBS), who were deemed to be a Managed Service Company Provider in the Court of Appeal following defeat at the Tax Tribunal in 2016, has brought the MSC legislation to the forefront once again. Whilst this legislation had by no means been shelved, it was felt by many that this was simply gathering dust and was unlikely to be picked up by HMRC in the near future.
The definition of a ‘managed service company’ is a company:
• whose business consists wholly or mainly of providing, directly or indirectly, services of an individual to third-party clients.
• The individual (worker) supplying their services to the third-party client receives payments (or an aggregate of payments and benefits) from the service company equal to the greater part of the sums received by the service company from the client for the services provided by the worker.
• The payments received by the worker are greater than they would have received if all of the payments were treated as employment income of the worker relating to an employment with the service company.
The consequences of CBS being deemed a Managed Service Provider meant that all individuals operating via CBS are managed service companies, which has a similar effect to IR35 in that all income earned by the individuals operating through CBS will be reclassified as employment income.
There were many factors taken into account by the Tribunal in determining CBS to be a Managed Service Provider of which supported the fact that they were “involved” (ESM3520) with its clients, as follows:
• CBS benefited financially on an ongoing basis from the services provided by the owners of the PSCs.
• CBS earned interest on the tax/NIC deducted from the earnings of the PSCs that were held in a bank account that it controlled, and that the PSCs had no access to the monies being held for up to 19 months.
• CBS determined that any surplus funds over and above the salary paid to the owners of the PSCs would be paid by way of a dividend.
• CBS influenced the manner in which the PSCs paid their taxes.
• CBS controlled its clients’ money deducted in respect of taxes, by holding that money in CBS’s bank account earning interest (without the knowledge of its clients) for CBS.
CBS were unanimously considered to be a Managed Service Provider by the Tribunal, paving the way for HMRC to undertake further MSC compliance activity on the back of such success and let’s face it, HMRC have not had a great deal of success lately – most notably with IR35 enquiries.
The MSC legislation is extremely complex and should any of your clients receive a letter we would advise you to seek specialist advice straight away, to fully understand the circumstances and whether there is a defence to be made.
Qdos can also provide an MSC audit for your business should you be concerned that your operations could be classed as a managed service. Simply contact the consultancy team on 0116 269 0992.
• Kate Cox, Senior Employment Status Manager, Qdos Contractor
Lorraine Kelly and Kaye Adams: latest TV presenters caught in HMRC’s spotlight
Two high-profile IR35 cases involving two TV celebrities have recently been released. Lorraine Kelly provides her services as a presenter, most notably on the daytime programme ‘Lorraine’ for ITV, via her own personal services company; Albatel Limited. The appeal was heard in November 2018 and related to determinations issued by HMRC totalling £1,212,527.
Kaye Adams carried out work for numerous different clients, but it was the work she had undertaken with the BBC which was the subject of dispute – the tax liability at stake amounting to just over £40,000.
The contracts in question with regard to Lorraine Kelly (Albatel) were for work undertaken by Kelly as a presenter on TV programmes ‘Lorraine’ and ‘Daybreak’ during the period of 3 September 2012 to 10 April 2014, and as a presenter on ‘Lorraine’ between 11 April 2014 and 15 July 2017.
While there was a degree of control over the work and Lorraine Kelly could not provide a substitute, it was accepted that control in the main, lay with Ms Kelly. The Tribunal also concluded that Ms Kelly was in business on her own account and that the intention of the parties was never intended to one of employment. On this basis the appeal was allowed, and it was accepted that the contract was one of services.
Similarly, Kaye Adams was not instructed by the BBC. The editor in charge of the ‘Kaye Adams Programme’ who gave evidence stated that she was “very much a broadcaster in her own right, given that she works for others, she isn’t ‘BBC’s Kaye Adams’, she is a journalist who happens to work for us.”
As with Lorraine Kelly’s case, Kaye Adams did not have a genuine right of substitution but the Tribunal again concluded that Kaye Adams, operating via her limited company, Atholl House Productions, was not caught by IR35, and paid much consideration to the operation of the business as a whole. For example, the work Kaye Adams carried out for the BBC amounted to just over 50% of Atholl House Production’s income, during which time it did undertake work for many other clients.
The Tribunal stated that it was clear that Kaye Adams had spent a large proportion of her time working on other business interests, and that a considerable amount would have been spent on working for other clients.
The Tribunal referenced the case of Christa Ackroyd who was found to be inside IR35 following her appeal in 2017, being mindful that similarities between the cases would be drawn, and pointed out that in the Ackroyd case, the work with the BBC was its main contract and its main source of income. Additionally, the contracts were for a much longer period and it was established that there was much more control exercised over Christa Ackroyd.
With the exception of their success with CAM Ltd (Christa Ackroyd), HMRC are struggling to prove contractors as disguised employees at Tribunal, further cementing their reputation for poor interpretation of the IR35 legislation and desperation to generate tax revenue from genuine contractors.
For IR35 advice, training, or representation for your clients, please contact the Qdos consultancy team on 0116 269 0992, who would be happy to assist.
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