Accused by HMRC to be MSCs, Boox and Churchill Knight contractors must sit tight, and for a long while yet

The Managed Service Companies’ legislation hit many contractors back in April 2022, seemingly out of nowhere, and sent them reeling with confusion and worry. 

Some two years on it seems “MSC experts” can be found at a drop of hat, each with their own opinion on everything from standstill agreements to what will or won’t happen in the end.

But, writes David Harmer, a director at Markel Tax, what do we actually know now that we didn’t know back then, and what is likely to come next?

No guarantees as to what’s next for Churchill Knight/Boox contractors

While we can’t give any guarantees or provide 100% certainty on what will happen next, we helped many contractors back in 2016-2019; the first time HMRC utilised the 2007 legislation, and the transfer of debt aftermath, so we have some insight into what is likely to unfold soon.

And we are currently defending a number of contractors currently in HMRC’s crosshairs due to the 2022 activity which affected contractors who were customers of two well-known accountancy providers, Boox and Churchill Knight.

Some movement, but only a little

The scale of the action taken by HMRC in raising determinations was enormous, which gave rise to some serious concerns due to the department’s apparent lack of available resource. What we have seen, and heard from many contractors accused of being MSCs, is stilted communication, estimated liabilities and no real sense of meaningful co-ordination.

From the cases we have seen, HMRC fact-finding has been limited at best, placing reliance on paperwork and the marketing literature of the providers but without any real detailed examination of how each contractor operated or their own circumstances.

Limbo, of the expensive kind

For many contractors this means they are still no further forward and are left almost in the same position as they were two years ago, albeit now additional years of liability have accrued as has interest and penalties for all those under appeal.

A limbo, of the most expensive sort, if you will.

For others, we have seen some success stories – albeit mainly reserved for those contractors who have been able to evidence that they did not receive 50% or more from the income generated by their engagements.

While this has not been a swift process, HMRC has accepted evidence and entered into discussions.

The elephant in the room

Further, some contractors have been able to obtain clarity over their potential liabilities and have been able to agree amended figures with HMRC.

These movements, while positive, have taken considerable time.

But the elephant in the room is mostly still open to debate -- is the contractor a Managed Service Company or not?

Incoming: The MSC test case(s) of Boox and Churchill Knight

This main point of issue will need to be determined by the tax tribunal.

Currently HMRC has selected a number of MSC cases to be joined and heard as a test case. 

This has been a lengthy process and the selection of these cases has been mired with complications and delays.

It is highly likely (though not a certainty at this stage), that two “test” cases will need to be heard; one in respect of engagements with Boox, and one in respect of engagements with Churchill Knight.

What must HMRC demonstrate for a test case application to be heard?

In order for application of a test case to be heard, HMRC must demonstrate that there is common fact and law among the cases selected.

From what we have gleaned, certainly in respect of one of the potential MSCP providers, HMRC’s initial application for a test case appeared to be that some contractors were further along in their appeal journey than others, and that is why they were selected!

Test case (and detail) - pending

It now seems others have been “selected”, though the detail from HMRC as to why they have been selected is somewhat lacking.

As it stands, the tax tribunal is yet to confirm whether a test case is suitable, and this is not likely to happen until later this year -- or early next year, to accommodate the availability of all appropriate parties to attend.

Once a test case has been confirmed tribunal ‘directions’ (i.e. the order of what must be provided and by when) will take effect. 

Complex and lengthy so think Q4 2025

Given that it is likely there will be multiple contractors with differing advisers and potentially different representatives, this may be a complex and lengthy process to ensure all parties are treated fairly.

As a result, it’s likely a date for the actual hearing (which I would suspect would need 7-10 days in duration) would not be possible until toward the end of 2025. And only then can the real arguments begin.

What will be argued in the MSC test cases of Boox and Churchill Knight

Depending on the representation and the adviser, there may be numerous arguments made on various topics such as:

• whether pension contributions are income;
• HMRC’s lack of fact-finding;
• the quantum and potential offsets;
• the interaction of MSC legislation with other pieces of legislation.

An unnecessary distraction?

While it may be understandable that some may want to pursue these lines of argument, in our opinion they likely do not service the best interest of contractors at a hearing. They all simply fall away if it is determined the contractor is not an MSC. 

Indeed, although the above four might be useful to argue at the stage of an HMRC Independent Review, once it gets to tribunal, they are likely somewhat of an unnecessary distraction.

It is our belief that simplicity, in the face of something as complex as the MSC legislation, is the best strategy.

The nub: One question, three possible arguments

In that vein, the arguments should be condensed down and focussed on a single question:

“Does there exist a business which promotes or facilitates the use of companies for the supply of services of individuals which is also involved with the company?”

This effectively leaves three possible arguments:

1. There is an MSCP, and an MSC, but the MSCP was not “involved” with the contractor’s company.

As we have stated many times we do not foresee any success in this line of argument. The case of Cristianuyi left very little scope to argue ‘non-involvement.’

2. An accountant isn’t automatically an MSCP if they merely provide accountancy services on a professional basis.

This second line of argument may have some potential if the deemed MSCPs can evidence that all they did was simply provide accountancy services in a professional capacity; evidence from contractors would likely strengthen this. 

While we do not accord with HMRC’s view that the use of an online portal somehow converts an accountant into an MSCP; there is some danger this argument may not succeed. 

A third party can still be an MSCP if only part of its business promotes and facilitates the use of limited companies for the provision of services of individuals. It does not need to be the sole reason they exist.

Indeed, the Christinuyi ruling made it clear that an accountant operating as such would be expected to provide tailored advice to each of its clients. This will be a question of fact.

3. There did not exist a third party which is in the business of promoting or facilitating the use of companies for the supply of services of individuals.

If no such entity exists, then no liability can be placed at the door of contractors. There is no established case law for this argument (Christianuyi did not look at this aspect of the legislation).

It will be interesting to see how the tribunal tackles this and what weight is given to HMRC’s arguments (as mentioned above the use of an online portal, in a world where HMRC itself is encouraging making tax digital, seems to us a weak argument to support the view of facilitation).

Evidence, hopes, and non-involvement (with a side of fierce independence)

As with all tax matters that reach tribunal, written evidence and witness evidence will be paramount, while undoubtedly documents issued by the deemed providers will be utilised, it is hoped that the tribunal will give significant weight to contractor witness evidence of their interactions with these providers and their independence of operation.

From the cases we have seen it is very clear the contractors we are dealing with are fiercely independent, and simply needed an accountant -- any reputable accountant, to submit their returns and the like.

The contractors certainly were not looking for anything more ‘involved’ than that.

Pleas be aware, though, we have not seen every single case. That said, we are hopeful this is the norm rather than the exception.

HMRC’s quest for scalps under MSC legislation: when will it all be over?

Unfortunately I am not tribunal judge and I do not have a crystal ball.

But I would say that in the event the hearing takes place in the latter part of next year, we could expect a judgment to be released by June 2026.

At that point, however, I would anticipate with almost absolute certainty that whoever loses will seek to appeal to the courts. Depending on the victors, and the funds available, it is likely we could see multiple appeals up to the Court of Appeal (as was the case with Christianuyi).

Therefore, we could be seeing in the New Year of 2030 before we receive a final conclusion! This extremely, extremely long time to wait for resolution is by no means good news for any contractor currently caught up in this HMRC action under the MSC rules, and I would be very pleased to be wrong -- on this occasion -- but we simply cannot rule out the possibilities of multiple appeals.