The case of Christianuyi v HMRC and what it means for your business

HMRC’s latest foray into the contractor sector is small in scope, but it could breed an even larger threat to contractors than IR35.

Recent enquiries into two accountancy services providers under Managed Service Company (MSC) legislation seemingly came from the blue; it was arguably prompted by a Court of Appeal (CoA) judgement in 2019 on Christianuyi Ltd and Others v HMRC.

Unfolding the Christianuyi case

The MSC legislation was introduced as part of the 2007 Finance Act as an anti-avoidance measure, in response to the creation of ‘composite companies’. The purpose of a so-called composite company is for a group of shareholders to enjoy ownership and operate the company as a service provider, subsequently benefitting from the way in which payments are made and ultimately avoiding employment taxes on payments from their clients.

In this case of Christianuyi and others, the owners and sole directors of five appellant companies were each operating a business of providing professional services to third parties. The court considered whether the companies were in fact MSCs for tax purposes and if their provider – Costelloe Business Services (CBS) – was an ‘MSC Provider’ by ‘promoting or facilitating the use of companies to provide the service of individuals’.

The appellants based their argument on the government’s initial 2007 consultation document ahead of the introduction of MSC legislation. This set out that in determining MSC status, it should be considered whether the nature of the provider’s business is the same as that of its composite companies. It was observed in the court that each appellant arranged and negotiated their own contracts, including their service rates and terms.

However, the provider offered a ‘Gold Business Service’ to the appellant companies which HMRC argued had a direct ‘influence or control’ over the way in which payments to the individuals were made.

The court ultimately agreed with HMRC’s view that CBS fit the definition of an MSC Provider, meaning that their clients – including the five appellant companies – were MSCs.

Control and influence

In commercial law, the extent of influence and control of a shareholder or agent within a company can be difficult to determine. The factual matrix of the relationship between a sole director and their accountant should be considered as well as the scope of their role in the business. A speech by Lord Nicholls of Birkenhead in R v Secretary of State for the Environment, Transport and the Regions 2001, is relevant here, in expressing that where ambiguity in legislation is found, the courts can interpret it with the help of external parliamentary aid – in this case, the government’s 2007 consultation document that set out the scope of proposed MSC legislation.

The consultation document articulated that the worker’s role and function in an MSC conflicts with the responsibilities of a company, in that an MSC worker is not in business on their own account, which means they lack control over the business.

Implications of the ruling

The decision in Christianuyi v HMRC has green-lighted a broadening of HMRC’s enforcement approach to pursue tax on income generated in other arrangements it deems to be within scope of the legislation.

Not only will the income of contractors caught by MSC legislation be subject to PAYE income tax and NICs, but the decision also permits the transfer of tax debt accrued by a contractor, who subsequently defaults on payment, enabling HMRC to "recover from other persons" – which could include the staffing agency and its directors. Moreover, this decision proved instrumental in causing some accountancy firms to rescind their activity in the contractor sector.

As a result of the most recent MSC inquiry, contractors are now receiving Regulation 80 determination notices, stating HMRC’s view that their companies have been determined to be MSCs.

Although side-by-side the two tax statuses of ‘employed’ and ‘self-employed’ seem straightforward, the boundary between the two is notoriously complex; the decision in Christianuyi v HMRC has compounded this further still. Going forward, contractors should remain vigilant to the threat of MSC legislation and scrutinise the degree of control they have over their company’s affairs to ensure that they are safe from a broadening of HMRC’s investigation in future.