IR35 – another HMRC court thumping

IR35 – another HMRC court thumping

A public-sector IT contractor has beaten HM Revenue and Customs in court, successfully appealing HMRC’s demand to pay £26,000 back in tax. This follows another defeat from HMRC on IR35 as we reported on in our blog post of 27th June 2018.

Ian Wells is the latest in the recent influx of landmark IR35 cases in the UK, sparking conversation about whether the unpopular legislation is still too vague to be applied and policed effectively and consistently.

 

Mr Wells vs HMRC

Providing business analyst services through personal service company Jensal Software Limited, via Capita Resourcing Ltd, Mr Wells worked as an IT contractor on the Department for Work and Pensions’ (DWP) Universal Credit project between May 2012 and April 2013.

HMRC argued that the nature of Mr Wells’ work with the DWP should fall within the scope of IR35, since the arrangements were not casual, he was engaged virtually continuously in the project for over ten months, and was obliged to work from 9am to 6pm each day.

 

How do HMRC judge IR35 cases?

For potential cases of IR35, HMRC try to determine the real working relationship between the contractor and their client.

IR35 was designed to stop occurrences of “disguised employees”, that is, employees working under the guise of a contractor in order to receive the attractive tax benefits that come with contracting.

HMRC investigators will look at whether a contractor working through their intermediary should be considered a third party providing a service or as an employee working for the client by drawing up a ‘hypothetical contract’ based on the what they can see of the relationship.

Many contractors already have contracts in place with their clients but HMRC will start completely from scratch in their investigation to establish the facts.

Once this hypothetical contract has been created, it will then be used to see if the working relationship resembles that of a B2B arrangement or an employment contract.

If HMRC decide the contractor and client are, in fact, more of an employer and employee, IR35 will apply and both will be made to pay any tax owed.

 

The criteria

HMRC make their decision using their three ‘tests of employment’. These are:

  • Mutuality of obligation – Is the client obliged to offer work, and must the worker accept it whenever they do?
  • Substitution – Is the worker personally required to complete the work, or can they send someone else in their place?
  • Control – Does the client or the worker decide when, what, where, and how work is carried out?

HMRC then make their ruling depending on whether they consider the worker to be an employee of the client rather than a contractor. If this is the case, the worker will be made to pay all of the income tax and National Insurance Contributions (NICs) they should have paid as an employee, and the client will be forced to pay Employers’ NICs.

However, even if they make this ruling, workers will have the opportunity to appeal the decision in court like Mr Wells.

 

What happened in Mr Wells’ case?

Judge Jennifer Dean oversaw Mr Wells’ appeal of HMRC’s decision, finally ruling that all elements of Wells’ contract showed he was an independent contractor, not an employee, and should not be made to pay the £26,000 penalty.

The Judge noted that whilst there was a mutuality of obligation, this did not in her opinion extend beyond the minimum required for the project to be completed.

Moreover, she believed that Mr Wells was under much less control by his client than the actual employees working at the DWP; sufficiently proving he was on a contract for services.

Let’s look at how the tribunal came to their decision:

  • Mutuality of obligation

Each contract Mr Wells undertook for the DWP lasted for only a short duration, with the break between contracts lasting approximately two weeks at a time. This shows there was no contractual obligation for the DWP to offer continuous work to Mr Wells.

On top of this, if the DWP chose to end their contract at any time, Mr Wells had no contractual right to demand further work.

Mr Wells was also under no obligation to carry out the work for the DWP, and even terminated his final contract when a better opportunity arose elsewhere.

  • Substitution

It was also found by the court that Mr Wells’ contract for services included a specific substitution clause, stating that if he decided he no longer wished to work on the project, he could send someone else as a substitute for him.

Although this never happened in practice, the evidence of a substitution clause showed that Mr Wells was not an employee.

  • Control

Finally, Mr Wells was left to his own devices to decide what was needed for the project, how he would do it, and set his own timescales in which to complete the task.

Mr Wells was also able to decide where he worked, and the DWP’s policies stated that he could not be asked to undertake tasks outside of his own scope of engagement.

It was clear to the court that Mr Wells had a great deal more autonomy over his work than employees of the company.

Judge Dean summed up by saying that “looking at the overall picture and making a qualitative assessment I am satisfied that the relationship is consistent with a contract for services, not a contract of service.

“In reaching this decision I have made a value judgment on the features in this case; some of which are neutral and some which provide a more compelling indicator that the hypothetical contract would be one for services.”

 

What does the case mean for other contractors?

Andy Vessey, who defended Mr Wells in the case, told IT Contracting that he believed “the reason the department allowed this case to go all the way was because the end client was a public sector body, and they felt confident of winning and thus firing a warning shot across contractors’ bows.”

“Thankfully, it blew up in their face.”

There is still a lot of confusion around HMRC’s decisions on alleged cases of IR35, which means contractors should prepare themselves for potential investigations.

Make sure you’re aware of the key factors the judge flagged up in her ruling, and consider including such clauses in your service contracts to protect yourself in the future.

 

We can help

If you’re a contractor and are not sure whether IR35 applies to you, speak to your SMART team today. We can help you keep on top of your tax liabilities to ensure you stay in the taxman’s good books.

Call us today on 01202 577500 to speak to the experts or email info@yoursmartteam.co.uk.

Start typing and press Enter to search

contractors-clients-under-IR35-spotlight-smart-team-bournemouth-accountants