IR35 Test Case
HMRC has won its first IR35 test case. The Managed Serviced Company (MSC) rules were introduced from 6 April 2007 to crack down on businesses that ignored the IR35 rules on an industrial scale. Those businesses provided tens of thousands of workers such as cleaners, drivers and security guards, with packaged service companies.
The MSC provider would typically make extensive use of the reliefs for employee travel expenses to reduce the tax and NIC of the workers. Those reliefs have been curtailed from 6 April 2016 where the worker is subject to supervision, direction or control in their job.
HMRC has found it almost impossible to enforce the IR35 rules, so it decided to write new rules to impose PAYE and NIC on all of the worker’s income, including dividends, which he receives from an MSC. What’s more if the MSC does not pay over the tax and NIC deemed to be due on the worker’s income, that tax debt can be transferred to the MSC provider and to then on to the directors of the MSC provider.
Such is the complexity of the MSC legislation that it has taken nine years for a test case on these rules to come before a tax tribunal. The Christianuyi Ltd case names five individual personal companies (the MSCs), but the organisation really on trial was the MSC provider – a company called Costelloe Business Services Ltd (CBS).
For the MSC rules to bite there has to be both an MSC provider and that provider must be “involved” with the MSCs. Accountants and lawyers should be exempt from being defined as an MSC provider if they are only providing services in a professional capacity.
CBS admitted it was an MSC provider, but denied it was “involved” with the MSC companies. There are five tests of “involvement” within the MSC rules, and only one of those tests has to be met for the involvement condition to stick.
Once a company has conceded that it is an MSC provider it will be virtually impossible to avoid the “involvement” test. In this case HMRC accused CBS of three forms of involvement:
- benefiting financially whenever the worker actually provided their services;
- influencing or controlling how the worker received their payment; or
- influencing or controlling the worker’s company finances or other activities.
The tribunal decided that all three forms of involvement were present, so CBS was involved with the MSCs, and the MSC rules took effect.
MSCs are still widely used in many sectors, particularly to provide the personal services of delivery drivers.
The Road Hauliers Association (RHA) is actively advising its members to be paid under PAYE if they are not the operator (owner) of the vehicle they are driving.