HMRC charts Costelloe’s defeat in Spotlight 32

The taxman has used his win over Costelloe Business Services under the MSC legislation to update his Spotlight series.

So ahead of collecting an estimated £6million from users of CBS’s ‘accountancy’ services, HMRC has produced edition 32 of its “little-read” publication around the company’s defeat.

But although Spotlight says its aim is to “warn [taxpayers] about certain tax avoidance schemes you should be aware of,” HMRC’s write-up of the Costelloe case omits practical considerations that individuals directly unaffected by the judgment ought to make.  

‘Contrived accountancy service’

So experts are now having to fill the gap instead. “Last year HMRC won a case against a limited company contractor using Costelloe Business Services Ltd as the company’s accountant,” says former tax inspector Carolyn Walsh.

“Now [that CBS has lost its appeal], notices to other users of CBS as an ‘accountant’ [are going to be issued] and HMRC believes it will recoup over £6m from those taxpayers.

“But contractors ought to remember -- this isn’t about offshore or loan arrangements, this has been caused by a contrived accountancy service”.

‘Promoting or facilitating’

In guidance to the MSC rules, the Revenue makes clear that a tax advisory simply completing tax returns and solely providing tax or accounting advice is not the intended target.

“The test is whether a person is carrying on a business…of promoting or facilitating the use of companies to provide the services of individuals,” the guidance adds.

Costelloe’s interpretation of these words, and arguing that it failed the test -- therefore making it not caught by the MSC legislation, was the basis of its defence at its now-rejected appeal.

‘Nonsense’

“Suggesting ‘accountants’ are caught [is] nonsense,” said Chris Leslie of Tax Networks Ltd, reflecting online about the MSC rules. “An accountant who performs [just] accountancy services is not caught”.

This clarification indicates it is only where accountants do more than the likes of submit tax forms, such as requiring the PSC to be paid via the accountant’s firm, that risk of exposure to the rules arises.

‘Not in control’

“If a contractor is not in control of the company affairs or finances, that’s also cause for concern,” advises Walsh, who is the managing director at Andraste Accounting.

“And there is an exemption [in the MSC legislation] for genuine accountancy service providers, but when it comes to contractors, who have set up a company, mainly as a vehicle for payment, and the accountant does no more than provide limited companies as vehicles, the line can be very thin.

“I even think ‘automated’ accountancy services, where there is no professional input, and everyone’s accounts are churned out in exactly the same way, are a potential risk.”

‘Rent-a-PSC’

Despite the latter claim, one of the criterion of a Managed Service Company Provider appears at odds with such automated, hands-off accounting models, as it specifies the company must be “involved” with its clients.

But the boss of an umbrella company yesterday said that anything resembling a “rent-a-PSC affair” would immediately attract HMRC’s suspicion as being caught by the MSC legislation.  

Meanwhile, writing online, one user on LinkedIn said the tax authority was now likely to use its win over CBS – outlined in Spotlight 32 -- as a “battering ram.”

‘Supersedes IR35’

And even though the legislation contains debt-transfer provisions for third parties, contractors would be on the receiving end of the Revenue first, with much less comeback than they might expect.

“Where the accountancy service provider is actually a managed service company provider, the calculation is the same as the off-payroll working rules, with no redress, even if IR35 definitely does not apply, and all company income is subject to deduction under PAYE with the attached penalties,” says Walsh.

“In other words,” she added, “the MSC legislation supersedes IR35, so if contractors are caught, they don’t get the chance to argue their status. MSC legislation turns company income into deemed income, like the off payroll working rules, with no 5% allowance and no appeal as it’s not a status issue.”

‘Ample warnings’

A source sounded less sympathetic in the event that contractors are targeted, telling them last night: “There have been ample warnings since 2007 about using accountants that do more than just submit your company tax returns.

“Having no choice but to use that accountant, or you having no hand in setting up your company… [would be a red flag to HMRC because it] smacks of it being set up for the purpose of being more a method for payment than a going concern.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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