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David vs Goliath | AccountingWEB | What happens in Gateshead...
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IT contractor takes on Goliath in IR35 case

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Dave Chaplin gives us a peek behind the curtain of an IR35 tax case, which saw an IT consultancy take on the Goliath that is HMRC.

19th Apr 2024
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In March 2018, Chris Leslie of Tax Networks asked me to assist with an IR35 tax case for RALC Consulting Limited, a company owned by Richard Alcock.

Leslie had been in the Revenue for 23 years and his forensic fact-find uncovered the hallmarks of an entrepreneur founding a consultancy rather than a scenario of two parties interposing a limited company to save tax – the latter prevention of which was the purpose of IR35.

HMRC received a formal report from Leslie containing substantial representations of the facts and included an outside IR35 check employment status for tax (CEST) result. While he knew HMRC’s CEST tool wasn’t the law, HMRC claimed they would “stand by” it, so it was completed anyway and given to HMRC.

Independent view

The department’s statutory review conclusions letter was silent on the report but dismissed the CEST result. Without providing details, HMRC said: “The tool only provides a conclusive result if based on the correct information. On reflection of the evidence I have seen, I do not agree with this position. The conclusion of the review must focus on the evidence presented and the applicability of the relevant law.”

Leslie sought my independent view to avoid GIGO (garbage in, garbage out) concerning CEST’s outputs. We listed all the evidence, formed a multi-factorial data set and answered each CEST question, choosing the answer most tightly bound to the corroborated evidence, all detailed in a 105-page report.

With HMRC refusing to back down, the appeals court was next, and my role was to be a witness for my analysis work. At a preliminary hearing, HMRC tried to remove me as a witness (succeeded) and remove the CEST analysis (failed) while informing the court that CEST was “irrelevant” (it is).

So, the Team RALC trio headed to the appeal hearing in Gateshead to take on Goliath (HMRC).

Filtered hearsay

HMRC arrived without providing witness evidence and partly relied on information described by the Judge as “hearsay and filtered through the medium of an HMRC note taker”.

Team RALC’s mountain of corroborated evidence included seven witness statements, many relevant documents and communications, and a transcript and recording of a telephone conference between the RALC representatives and Janice Hartley and Tim Read, both senior civil servants who had worked closely with RALC at the Department for Work and Pensions (DWP).

During the three-day hearing, HMRC subjected Alcock to an eight-hour cross-examination in its attempt to undermine the substantial evidence base, which included facts such as:

  • the right to subcontract established in evidence
  • project-by-project-based working, with variable times and rates
  • RALC’s business infrastructure, including premises, a website and email domain
  • unpaid work for Accenture/DWP, positioning himself for future opportunities, underscoring his entrepreneurialism
  • the unreliability of testimonies, notably HMRC’s notes of meeting
  • Accenture correspondence with HMRC comprehensively pointing outside IR35
  • recorded transcripts and witness testimonies collectively supporting the conclusion that RALC’s engagement was not deemed employment.

HMRC’s counsel failed to gain ground during Alcock’s cross-examination, at one point seeking to undermine his credibility by accusing him of knowingly misleading HMRC. However, the tribunal said his character was not “impugned”.

Closing submissions

Following the cross-examination of the RALC witness evidence on day two, Chris and I worked until 5am, preparing for the final day closing submissions. On day three, HMRC presented the tribunal with a lengthy document containing selected points from the witness evidence to support their case, which we had insufficient time to read.

HMRC presented closing submissions first, followed by Leslie. Halfway through, the judge suggested we hand him Leslie’s speaking notes to read, take a 15-minute break, and return for a chat.

The judge surveyed the case, asking both parties pertinent questions. Leslie delivered a superb final submission to the tribunal that traversed the evidence, demonstrating Alcock was a person trying to carve his way in the business world and wasn’t a “deemed employee”.

Case law authorities

HMRC’s counsel focused on specific contract clauses and case law authorities.

The judge addressed HMRC’s counsel and asked him if HMRC had any legally binding authority to pick the clauses from the contracts that suited HMRC’s case and ignore the ones that didn’t.

There is no such authority.

Leslie nudged me and said: “I think we’ve just won.” The judge asked him if he had anything else to say as the final word. “I have said enough,” he responded.

We left the court feeling confident, and the decision was released publicly in March 2020, confirming the successful appeal. HMRC appealed, and four years later, in April 2024, the upper tribunal set aside the decision and remitted the case back to FTT.

Notably, HMRC leveraged legal arguments from case law decisions made years after the original FTT decision.

Legally untidy

In hindsight, the original FTT decision was legally untidy and Judge Jones didn’t have a time machine to know about the future cases. However, in my view, the judge made the correct evaluative decision based on carefully considering all the facts of the case.

He may have bumped his car on a few kerbs as he reached the destination but the destination was correct. Alcock isn’t a tax avoider. He was trying to plant an entrepreneurial seed and become a wealth creator.

Written case decisions are akin to a football game match report and don’t come close to detailing what happens on the pitch. Only those involved in the case and three-day hearing know the whole story.

RALC’s story is not about case law. It is about the Goliath of HMRC seeking to beat an IT contractor by pursuing him at all costs, aiming unlimited legal firepower at a weak defendant, and three individuals stepping up to the plate and taking them on, resulting in the appeal being upheld by the FTT.

While HMRC has recently shown the FTT erred in law, a final decision has not been made, and given that RALC may now become insolvent, a return to the FTT looks out of financial reach.

What happened in Gateshead, may stay in Gateshead.

Get the details of the case from Rebecca Seeley Harris.

Replies (2)

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By FactChecker
19th Apr 2024 17:59

Although we've always known that the CEST tool "isn’t the law", HMRC have always been happy to claim (to the PAC, on GOV.UK and in various Employer/Agent bulletins) that they would “stand by” the result.
But always added (sotto voce or in footnotes) that “The tool only provides a conclusive result if based on the correct information”.
This of course, in the absence either of a definition of how the 'correctness' of information might be determined (let alone by whom in an arena where interpretation is in play throughout), makes the supposed 'promise' absolutely worthless.
Actually not far removed from a general Election in Russia ... where you can vote for whomsoever you want, but the tellers can determine (without need to state reasons) that your vote is incorrect - and may bring serious consequences upon your head.

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Replying to FactChecker:
Dave Chaplin
By Dave Chaplin
22nd Apr 2024 12:22

As useful as a chocolate fireguard

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