Churchill Knight & Boox clients being investigated as Managed Service Companies

[GregRickshaw]

They have a fig leaf of an argument with CK regarding a reduced fee for dormant companies, but that will almost certainly fail because there is a clear commercial reason. With (2)(c), on the other hand, there is a respectable argument, so it would make sense to gather all evidence that the financial decisions were ultimately yours. Forget about (2)(a), it’s threadbare and there is nothing much to be argued or countered on that point, it is elementary.

Thanks james

[PurelyBlue]

Unfortunately it looks like condition (a) is a risk, if only due to an odd judgement from the Upper Tribunal in the Costello case.

Starting on page 41 it says:

We reject the contention that section 61B(2)(a) contains any requirement of proportionality or correlation between the amounts earned as a result of the provision of the services of the individual
and the extent of the financial benefit to the MSC provider. Section 40 61B(2)(a) contains no such requirement on its face, and we see no reason to imply such a requirement.

That, we consider, would be an open invitation to precisely the sort of evasion that Parliament would have been astute to avoid. Indeed, on the Appellant’s case, all that would be required to ensure that CBS was not “involved” with the Appellants was a relatively minor change in the way in which
CBS charged for its services.

It follows that, to the extent that the FTT considered (in [291] of the Decision) that it was necessary to find some sort of correlation between CBS’s charges and the payments to the Appellants, we consider that the FTT was seeking to establish a requirement not actually present in section 61B(2)(a).

Note here that the UTT is actually disagreeing with the FTT, which was using a more sensible interpretation of condition (a).

Also note that even HMRC thinks there's supposed to be a correlation:

This recognises that fees charged to companies by professionals do not normally have regard to the ability of the workers in the company to generate income: the presumption is that if the company retains the services of a professional, fees will be paid. These will usually vary with the professional services provided and not in relation to the income/profits of the business.

Interestingly, the UTT seem to recognise the implications of their judgement, but apparently weren't bothered because they were quite sure about the outcome for the Costello case:

We note the contention advanced by the Appellants that a wide construction of section 61B(2)(a) would embrace the services of - for instance – payroll service providers. Viewing section 61B(2)(a) in isolation that is no doubt correct. However, we say nothing, in this decision, as to the application of section 61B to payroll service providers.

It is clear that whilst CBS did provide payroll services, it provided many other services in addition. It seems to us that the question of whether a payroll service provider simpliciter falls within the scope of section 61B of ITEPA is not a question before us, and not one that it would be helpful for us to address.

We would only observe that, in order to discern the precise limits of the legislation in relation to payroll service providers simplicter, it might well be necessary to re-visit the Parliamentary materials in light of different contentions in relation to the scope of section 61B of ITEPA.

As it is, it remains an open question – on which we say nothing – as to whether a company providing solely payroll services to a company meeting the requirements of section 61B(1)(a) to (c) 30 would fall to be considered a “MSC provider” within section 61B.

I expect that HMRC was probably as surprised as anyone else about this judgement, and now want to see how far they can push it. Hopefully sanity returns once the tribunals are faced with a case that isn't nearly as clear cut as Costello.

[PurelyBlue]

Also I should add that as I understand it, the court of appeal didn't consider the question of condition (a) or any of the other conditions, only the definition of an MSCP. So the UTT conclusion could well be overturned, and it seemed like they even left the door open for that by leaving payroll providers as an open question.

[jamesbrown]

Appreciate the above, but there is nothing much to be argued or countered in relation to (2)(a). It is the simplest of all the conditions and either the legislated words that link the payment to the services matter or they do not matter. I think they matter and will ultimately be found to matter. Either way, there is little that can be done to advance or evidence this point. A payment was made, either for accountancy services or to an MSCP providing services to an MSC. I also think this point is an error of fact:

all that would be required to ensure that CBS was not “involved” with the Appellants was a relatively minor change in the way in which CBS charged for its services.

The legislation is quite clear that any one of the (2)(a) through (2)(e) conditions is sufficient for the MSCP to be "involved with" the MSC, so it cannot be true that the failure to breach (2)(a) means that the legislation would be circumvented. Most other conditions were failed by CBS. Furthermore, condition (3) is clear that all of conditions (2) are inapplicable for an accountant providing their services in a professional capacity.

[PurelyBlue]

Appreciate the above, but there is nothing much to be argued or countered in relation to (2)(a). It is the simplest of all the conditions and either the legislated words that link the payment to the services matter or they do not matter. I think they matter and will ultimately be found to matter. Either way, there is little that can be done to advance or evidence this point.

Indeed, the UTT's interpretation of condition (a) also seems deeply flawed to me for exactly the reasons you state, and should be overturned. Unfortunately in the meantime it's given encouragement to HMRC to try it out.

[eek]

Indeed, the UTT's interpretation of condition (a) also seems deeply flawed to me for exactly the reasons you state, and should be overturned. Unfortunately in the meantime it's given encouragement to HMRC to try it out.

Given that it was accepted by the court of appeal - it can’t be overturned it’s now case law

[PurelyBlue]

Given that it was accepted by the court of appeal - it can’t be overturned it’s now case law

As I said above, my understanding from reading the decision is that the court of appeal only considered Section 61B(1)(d), i.e. this part of the legislation:

(d) a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals ("an MSC provider") is involved with the company

Specifically, they considered the definition of 'MSC provider' here, and whether "in order to be an MSC provider, a company must promote or facilitate the services provided by the companies the use of which it has promoted or facilitated". They of course concluded that it does not (which seems reasonable to me).

The court of appeal didn't consider Section 61B(2) (the five conditions for being involved); the decision itself says:

There is no appeal against those findings that Costelloe was "involved with" the Appellants for the purposes of section 61B(2).

You can read the decision here.

[Fred Bloggs]

Given that it was accepted by the court of appeal - it can’t be overturned it’s now case law

Not quite true, but close. If anyone had deep enough pockets, the appeal court decision could have been over turned by the supreme court. But it hasn't happened so at the moment, yes, it's case law.

[jamesbrown]

As I said above, my understanding from reading the decision is that the court of appeal only considered Section 61B(1)(d), i.e. this part of the legislation:

Right, the CoA only considered one very specific question about the interpretation of 61B(1)(d) referred to as Ground 10 (one of ten grounds of appeal to the UTT), so the case law, such as it is, only relates to that specific point, which was lost by the Appellants:

The issue which formed Ground 10 of the appeal before the Upper Tribunal and which is the sole ground of appeal before us was not an issue before the FTT

[man]

Is there any consensus on whether this situation may pose a problem for those who have used CK or Boox and then closed down their company successfully?

In my case, I've since moved and so I doubt I'd find out about the letters until it was too late.