HMRC lose IR35 case

HMRC lose IR35 case

A construction worker has just successfully appealed a HMRC judgement which declared him in breach of IR35 regulations.

In this article will explain what the IR35 rules are and why this case is so significant.


What is IR35?

Many employees and employers have been tempted to change the nature of their relationship to contractor and client.

Why? For the contractor, they can perform exactly the same work for the company they used to be employed by, form a limited company, and pay themselves far more efficiently in salary and dividends.

For the client, they are no longer bound by employment laws and do not have to pay sick pay, parental leave, and so on. They also do not have to pay National Insurance Employers’ Contributions.

The savings made by both the contractor and the client can result in £10,000 or more less tax being paid with this arrangement than if the arrangement was still employer and employee and the employee received a wage of £50,000.

HMRC did not like this and still don’t. They call it “disguised employment” and IR35 was the approach they decided to take to clamp down on it. IR35 is a set of rules that define the nature of “disguised employment”.

If you are a contractor and the nature of your relationship is revised by HMRC to that of essentially an employee and employer on a “hypothetical contract”, HMRC will expect you to pay the income tax and NI you would have paid had you been an employee. They will also levy fines against you and charge interest. The employer/client will then have to pay National Insurance Employers’ Contributions that would have been incurred if you had been on their books as an employer – plus interest and fines.


IR35 is not straightforward

The specific rules surrounding IR35 are vague. Many contractors are at risk of wrongly being penalised and wrongly labelled as disguised employees. What’s worse is that there is no consistency with who is and isn’t being targeted by HMRC.

Most contractors have adapted their business practices and their contracts of work to conform to the IR35 rules. If you’re in any doubt about IR35, please contact us without delay.


What happened in court?

In this landmark case, a construction worker overturned a HMRC ruling that claimed that he had an employment relationship with his client. Mr Daniels was accused of breaking the IR35 rules using his business “MDCM LTD”.

In court, Mr Daniels explained exactly what he does on a day to day basis and the terms of his contract. The reason that he was hired by his client is that many construction companies supplement their workforces with contractors whenever they take on large jobs. The demand for work will fluctuate depending on how many large projects that are completing at any given time.

In this particular instance, Mr Daniels was hired as a night shift manager to oversee the work on the site. The details of his contract were similar to contracts used by IR35 compliant freelancers across his industry.

A summarised version of his contract is as follows:

  • Mr Daniels is not controlled any more than any other contractors and had the ability to refuse to move to another work site
  • Mr Daniels was paid £310 a day
  • Mr Daniels had to pay for his own travel expenses
  • Mr Daniels was not protected by worker or employee rights
  • His client provided all of the relevant safety equipment for Mr Daniels
  • Mr Daniels was not integrated into the client’s business in any way

After reviewing this contract and similar contracts in Mr Daniels’ industry, the court decided that he had not breached IR35 laws.


We can help

Making sure that you can prove that you’re not under a “hypothetical employment contract” is vital if you don’t want to be penalised by HMRC. Let the Smart Team make sure that you are safe from IR35.

To get in touch with our team, call us on 01202 577 500 or email us at

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