TAXtv: Lessons from the ECR case

In July’s TAXtv episode Giles Mooney and Tim Good from examine the implications of the contractor’s recent victory in the ECR Consulting v HMRC IR35 tribunal case.

IT contractor Elaine Richardson, trading as ECR Consulting, won a case in May that could have cost her £50,000 (ECR Consulting v HMRC TCO1174). According to TAXtv’s Tim Good and Giles Mooney, her victory underscored the importance of three tests for distinguishing between contractors and full-time employees.

IT contractor Richardson picked up work through a number of agencies, but HMRC’s case focused on two particular agencies that provided billing software to power companies. HMRC argued that the amount of work she undertook for one agency meant was enough to make her an employee, and that she should be taxed as one.

However, she was able to successfully challenge the HMRC decision by showing that she met three tests for working as a contractor.

The first test was a “substitution clause” - the agency supplying her work to the power company could easily have supplied used other IT contractors during the project. The power company just wanted IT expertise, regardless of whether it was one person working on the project or different people.

“The people who were asking Richardson to do the work were simply asking for the agency to provide someone who understood the software systems and was able to do the work,” Mooney said. “They weren’t bothered about who turned up. They hadn’t really noticed it was the same person who turned up... as long as the person could do the work.”

The second test concerned the “contract relationship”. The client used Richardson on a freelancer because there were times when it needed someone to do the work, but there were other times when no work needed. “The end user was keen to keep [Richardson] at a distance and not keep her as an employee,” Mooney said.

The third test related to a change in fees. Richardson initially charged a £600 day for her software billing work when the IT contractor market was booming, but sharply reduced her day rate to £350 for later work in response to the economic downturn.

“The court agreed that if someone was an employee they would not agree to such a sharp drop in earnings,” said Mooney.

Other topics discussed in the July TAXtv episode include:

• HMRC consultation around its new Agent Strategy
• New statutory residence test discussed
• David Lowrie v HMRC TCO1170 - tax treatment on gain from property disposal
• Golding & Middleton v HMRC TCO1211 - right to agricultural relief for retired farmer

Visit shop@accountingWEB to subscribe to TAXtv. TAXtv's free Budget round-up is also available, in which Tim Good, Giles Mooney and Neil Warren explain the key points of this year's announcements.