Contractors providing services to businesses often do so through their own limited company, commonly referred to as a Personal Service Company (PSC). 

In the private sector until April 2020 (when the rules change - as previously discussed in the blog "Changes to off-payroll working in the private sector") the PSC is responsible for determining whether the individual would have been classified as an employee for tax purposes if the services were provided directly by the individual to the end user. If so, the so-called "IR35" rules apply to treat payments to the PSC as deemed employment income of the individual.

However, if a PSC is classified as a Managed Service Company (MSC) it doesn't matter whether the individual would have been classified as an employee for tax purposes if the services were provided directly - the payments to the individual in respect of the services provided (e.g. dividends) are deemed to be employment income of the individual in any case.

Understandably HMRC has been keen to demonstrate the wide applicability of the MSC rules - once a PSC is classified as an MSC there is no need to consider IR35. 

The recent Court of Appeal case Christianuyi involving PSCs set up by Costelloe (a business services company involved in setting up PSCs) gives considerable weight to HMRC with the case confirming that Costelloe was "undoubtedly an MSC provider" (and therefore the PSCs involved were "undoubtedly MSCs").

To be an MSC provider the business must be involved with a PSC in a way in which it either benefits financially on an ongoing basis (for example through standard ongoing fee structures) or have influence or control over elements of the PSC - such as the provision of services by the PSC or the way in which the PSC makes payments to the individual performing services.

Costelloe influenced how PSCs made payments to the individual workers (through a combination of salary and dividends) through the use of a standard product with ongoing fees - this amounted to "control".

Importantly, if a PSC is classified as an MSC it is not only the PSC itself that has a potential liability for employment income tax and national insurance contributions. HMRC confirms in its spotlight that, where the amounts are irrecoverable from the PSC, liability will be transferred to the PSC's director(s), the MSC provider, and the MSC provider's directors and associates - all of whom are jointly and severally liable. It is even possible, in certain circumstances, for unpaid PAYE to be collected from the client that engages the PSC.

Actions to take

Following this decision, and HMRC's recent spotlight on the issue, it will be necessary for PSCs, those involved in supporting PSCs, and end users of their services, to consider reviewing their arrangements to determine whether they may be considered MSCs.