HMRC lose another IR35 case

HMRC lose another IR35 case

The IR35 debacle rolls on as HMRC lose another case in the First Tier Tribunal (that’s the lowest court which decides on disputes between HRMC and taxpayers). And they lost this case even though the person they accused of being in the scope of IR35 didn’t believe he was but offered a settlement to HMRC to bring the case to a close. HMRC refused the offer.

 

Background

The case was brought to tribunal by Mr Armitage, managing director of his own personal services company, Armitage Technical Design Services Limited (ATDS). Mr Armitage worked in the nuclear industry as a designer of electrical drawings.

HMRC had contacted Mr Armitage prior to the situation that ended up in court and they agreed with him that the contract originally under investigation was not covered by IR35. Not satisfied, they then investigated another contract as they still believed that some of Mr Armitage’s work would fall within the scope of IR35.

Mr Armitage disagreed however he offered HMRC a settlement as a compromise for them to stop their investigation. HMRC refused as they contended the Mr Armitage had acted negligently by not discussing his IR35 status with his accountant prior to the submission of his P35.

The situation escalated. HMRC’s position was that all of his contract work for one particular client (Diamond Light Source Ltd (DLS)) between 2009/10 and 2013/14 were not IR35 compliant.

 

How did the First Tier Tribunal come to its decision?

When deciding on whether a contractor is in fact a contractor and a disguised employee, the First Tier Tribunal draw up a “hypothetical employment contract” between the parties which they then use to assess the true nature of the relationship.

In Mr Armitage’s case, the hypothetical employment contract was deemed as not an employment contract at all because of the following:

  • Mr Armitage used his own equipment

The defendant invested over £7,000 of his own money in equipment that he needed to provide his services to client and used this equipment while working for DLS.

  • Mr Armitage continued to work for other clients

HMRC argued that the fact that Mr Armitage carried out work for other clients while carrying out work for DLS was immaterial. The Tribunal disagreed.

  • Mr Armitage’s movement and work schedule were not controlled by DLS

his own choice, the defendant chose to work at one of DLS’s satellite offices, only visiting the head office on one occasion. No-one from the company supervised him and, rather than working to the company’s deadlines, he worked to his own.

  • Mr Armitage’s contract did not create a mutuality of obligation

Mutuality of obligation describes a situation where, upon the acceptance of a contract (like an employment contract), one party is obliged to offer the other work and the other party is obliged to accept that work. The Tribunal concluded that no such obligation was created by the contract between them.

  • Mr Armitage’s substitution clause in his contract was correct

Although a substitution was never required nor asked for, the First Tier Tribunal accepted that the contract did not require the defendant to perform the contract himself.

  • Mr Armitage’s labour did not “belong” to DLS

The defendant did not use DLS’s time management system, he did not have a locker for his personal belongings, and he was not paid by DLS when he was sick or on holiday. He also never attended any training events or socialised with the staff at company events.

 

No wonder HMRC are changing the rules

In 2017, HMRC changed the rules on public sector contracts meaning that you, as the contractor, were no longer in charge of deciding whether you were within the scope of IR35 or not. The belief in the industry is that these rules will apply to private sector contracts from either 2019 or 2020.

With a string of Tribunal losses behind it now and years of underfunding and understaffing HMRC to investigate IR35, it seems that every contractor will now pay the price for something that is not their fault.

 

Contractor support and help

SMART TEAM’s customer database has dozens of contractors on it, all of whom we assist with all manner of tax and IR35 enquiries. If you’re looking for a smarter approach, call us today on 01202 557 500 or speak to a SMART Team accountant for further advice.

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