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IR35 - The Lottery (Part 1) Workers 2 v HMRC 2

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15th Feb 2008
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"Extra Time Being Played" - Statements made in front of the Commissioners can seem more persuasive than the actual contract, but how can the worker be expected to know what will be said by the end-client at tribunal?

I write as a former Status Inspector who was deeply involved in the preparation of two of the four recent IR 35 cases that have appeared before the Special Commissioners in recent months.

Having now left the ivory tower and working this side of the street, I hope that my insight into the developments illustrated in these cases will help to show the way forward.

At first glance, results suggest that IR35 is still a lottery. There is still too much confusion to be able to predict the outcome with certainty. Whilst HMRC will be congratulating themselves over two victories, they will clearly be consoling themselves about the two they believe got away, believing “but for the Commissioner's choice of who to believe” the results could have been very different. However, that is a two edged sword as I hope to demonstrate.

What is frustrating about these four cases is that they are so similar. I’m sure you will have read about these cases namely:

There is very little to differentiate these cases from hundreds of typical arrangements that I have seen over the years. The conditions for the workers are similar; and there are only minor variations in the terms of the written contracts.

What is most noticeable is that HMRC won two cases because the Special Commissioners heard evidence from the end-client which they found convincing. They took less notice of either what the worker said or what was in the written contracts and more notice of what the end-client's representatives said in oral evidence. By contrast, in the two cases that the PSCs won, the evidence from the end-client was given less value for reasons we shall examine later.

This has caused a strong reaction and it has set the alarm bells ringing because contracts which say all the right things can so easily be set aside depending on what the Commissioners decide is the relevant evidence. This is what makes IR35 such a lottery. How can the worker be expected to know what will be said by the end-client at tribunal? As the final decision hinges on this information and it is not available at the outset, how can the worker make a rational decision about the IR35 position?

The situation is made worse because of the time it has taken to bring these investigations to conclusion. The process for bringing these cases to tribunal is too slow for legislation with such a high public profile. At least one of these cases was submitted for hearing in August 2005. For all concerned, and especially the PSC, it is sad that these cases were not progressed with more urgency.

What emerges from these four cases is that HMRC has “got smart” in obtaining robust evidence from the end-client. In the two cases HMRC won, statements made by the end-client swayed the Commissioners. Looking at Dragonfly in more detail, it clear that the lower level contract (agency / PSC) contained a substitution clause. It was not a 'send who you like' clause, but nevertheless gave the worker some confidence. However, one end-client manager said he 'would not be happy' for that to happen. Another manager was recorded as having 'an absolute right' to refuse a substitute. (Incidentally the latter statement was given by the worker himself to HMRC! This illustrates graphically the imperative for workers to have good representation when being interrogated by HMRC! In evidence, the manager did not go so far as to say that, but did not deny it either.)

However the Commissioners’ conclusion was that the end-client “did not want just any competent tester, it wanted Mr Bessell.” If there is a requirement for personal service then no number of substitution clauses in the lower level contract will change that requirement. In fact, if the end-client is so sure, one is left wondering how anyone could imagine that substitution is a realistic option. This is certainly something that workers need to ascertain at the outset from the end-client if they want clarification of their IR35 position. (this will be covered in more depth in my next article).

It could be said that HMRC had some luck. Despite the delays, the relevant witnesses they needed were still in place. However the longer the review drags on, the harder it is for them to find managers who are still in post, who remember the workers, or indeed what projects and conditions they worked under!

With this in mind, for future cases, a carefully planned approach to this thorny subject could pay dividends!

Examining the two cases HMRC lost. In First Word Software, the Commissioner rejected the evidence from the end-client because one manager knew neither the details of the higher level contract nor the specific work done by the worker; and the other was not able to give direct evidence of events for the relevant period. By contrast, the worker himself was found to be a credible witness, and the Commissioner preferred his evidence as he spoke from personal experience.

In Datagate, a similar situation occurred. HMRC called a former senior HR manager, but she was perceived as talking in generalities. Would Charles Hillier (the Commissioner making judgment on Dragonfly and MKM) have been so dismissive? A second manager was indisposed on the day of the hearing and his written statement was hardly acknowledged. Things could have worked out differently so easily. However the flip-side is that the worker himself was well prepared, understood the issues and his version of the arrangements won the day for him.

The way ahead is to ensure that the workers understand the issues and is able to provide evidence of personal experience, supported by direct evidence of events. This will result in them being viewed as a credible witness.

The judgments given by Charles Hillier will inevitably be quoted by HMRC. His construction of the notional contract is impressive, even if you don't agree with his conclusion! I would commend the attempt to build the notional contract as something that everyone needs to focus on in all cases.

All four cases further illustrate the problems facing anyone wanting a definite answer to IR35. Evidence comes from four sources:

  1. Higher level contract
  2. Lower level contract
  3. Worker's version of arrangements
  4. End-client's version

These will not necessarily be in agreement. Who is telling the truth? What is the truth anyway when it is a matter of judgment and opinion?

Looking at your client's contracts, has the agency overstated the substitution position and understated the control that could be exerted by the end-client? Has the worker, being aware of how much is at stake, been tempted to put too much spin on his version of affairs? Do workers perceive themselves as experts, in business in their own right, whereas the end-client may see them (as was inelegantly, but graphically phrased to me by one end-client in the aerospace sector) 'Just bums in seats.” If HMRC have a witness who has this attitude to the workers, then it makes it difficult for the workers to demonstrate their business identity and integrity.

Part II of this article: A strategic approach to IR35 follows in a fortnight.

Steve Gretton now heads up employment status and IR35 services for Inspired Employer Solutions Limited which specialises in providing planning, advisory and support services in PAYE, NI, employment benefits, expenses, status cases, IR35, investigations and the Construction Industry Scheme." He can be contacted on 01793 611173 or [email protected]

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Replies (20)

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By IANTO
26th Feb 2008 11:07

Steve H.
Well said that man!

Might I also add that anyone "caught" by IR35 will pay more tax on any level of income than any other individual or organisation would, as a result of having to pay Employers' NI as well as Employee's NI.

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By User deleted
25th Feb 2008 11:46

John Williams
Saw a mention of my name, but have to confess that I have not been deliberately ignoring your posts - I was just away on holiday. Give me a few days to catch up and I am sure that I will have some more to say ; )

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By User deleted
22nd Feb 2008 16:53

not exactly, Jackson
(you're not by any chance an HMRC mole, are you?)
First - many contractors didn't actually opt for that status: it was forced upon them by employers who saw advantage in no longer providing paid holidays, sick pay, pension contributions, etc. and in the flexibility of having IT people on short-term contracts. IR35 ignores the fact that these contractors no longer have most of the benefits of permanent employment.
Second - many other contractors are genuinely in business on their own account - whether forced into that position, or voluntarily - but if found to be caught by IR35 are unable to grow their businesses. For them there is no level playing-field because HMRC says they're "really" employed by their end-client of the day.
Third - "Friday to Monday" NIC cheats is an emotive phrase (at about the intellectual level of a Sun newspaper headline) which is an insult to the vast majority of honest IT contractors who struggle to cope with the uncertainty and unfairness of IR35.

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By AnonymousUser
22nd Feb 2008 15:25

Mr Williams and his mates are getting bitten on the [***] are they

It is surely the IT professional who is to blame for IR 35?

It was the "Friday to Monday" NIC cheats who prompted IR 35.

It seems only fair that they should be the ones singled out by HMRC for special attention.

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By User deleted
20th Feb 2008 16:45

Just because you're paranoid ...
... doesn't mean they're not really out to get you.

I think John is quite right to be paranoid. Furthermore, it seems that the government is getting a bit more sure of itself after IR35.

Even though the timing proves it was merely a kneejerk reaction to the Arctic Systems case, the "family business tax" (even if it gets watered down) is deliberately drawn so widely that it could potentially affect almost every small business, whether agricultural, manufacturing, or service, and if it happens that HMRC actually concentrate their investigations on IT contractors, nobody will be able to prove it because HMRC probably won't be collecting statistics on the type of business they are targetting. So no case for the European courts. Also, of course, after the climbdowns on non-doms and CGT, and the Northern Rock debacle, I really can't see AD backing down on the FBT and still hanging on to his job. Despite 106 cross-party signatures (and counting) on the early-day motion to abandon the whole idea.

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By IANTO
20th Feb 2008 11:11

Paranoia
I believe that the weight of evidence, i.e. the regulations, IR35, MSC and the latest Family Business Tax, and the individuals who have been targetted and will be targetted, might indicate that HMG is indeed only targetting IT professionals, which clearly is illegal under EU Law. This was an issue which was explored in the Judicial Review of IR35 brought by the PCG. However, although we all believed this to be the case, at that time it could not be proven. Time will tell.

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By IANTO
20th Feb 2008 11:03

Martyrs
Haggis
The problem with fora is that it is difficult to identify "tongue in cheek" posts, and also those posts that are deliberatley set to create controversy. I'm afraid you're a victim!

However, I did engage in a politically motivated case to attemp to raise the profile of the unfairness of IR35. It was quite interesting that whereas the other case against Hewlett Packard which ran in parallel to mine, and which was brought for other reasons, was extensively analyzed by the accounting fraternity, mine was almost completely ignored. You can draw your own conclusions from those facts. I know what my own conclusions are, which you might be able to deduce from my posts, especially the post I made in response to Nichola Ross Martin's examples. Surprisingly she has remained silent since I made that post.

Finally, as long as I abide by the rules, I am as entitled to, just as any other member of AccountingWeb is, post my personal opinion on this forum. The problem with free speech is that sometimes individuals will say things which the majority do not like or agree with, but as the French say c'est la vie!

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By MikeBellisimo
20th Feb 2008 09:36

Paranoia?
I personally struggle to think of an area of Self-Assessment where your current liability will be established by the evidence of an unconnected third party given at a future date.

Self-Assessment is supposed to be based on making use of the evidence available to you at the time.

The implementation of IR35 allows HMCE to draw on present and future information that is not available to you in order to claim that an assessment made is not vaild.

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By mikewhit
20th Feb 2008 08:43

Paranoia ... on the other hand
There seems to have been such a plethora of Brown-inspired measures against John and his like, beginning with IR35, that could lead a suspicious person to think they were being persecuted !

(And don't forget the recent MSC stuff either.)

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By thehaggis
19th Feb 2008 19:38

Chips

John

You are a 21st century IT professional with a huge chip on your shoulder. There are a plethora of web forums that you could populate with your conspiracy theories; this is not one of them.

Frankly, to compare yourself to a Tolpuddle Martyr suggests delusion to such an extent that you ought to consider seeking help.

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By IANTO
19th Feb 2008 17:10

IR35 stuff
Chris,
It is to be expected that no one from the professions will comment on the political angle because they are part of the "establishment", but I'm not constrained by such niceties. I speak my mind and as I have already demonstrated in the courts, I am prepared to challenge the "system" and criticise the "establishment" even if it may be detrimental to me. (recently we had a high profile firebrand of the 60's as Secretary of State for Wales!)

None of us would enjoy the working environment that the 21st century offers us if it were not for the sacrifices and the risks that individuals like the Tolpuddle Martyrs made and took. In a very small way, I hope I have contributed to such elevated principles.

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By NeilW
19th Feb 2008 13:58

Liability of End Client
It was determined many years ago that the end client could potentially scupper any amount of careful IR35 planning by simply stating that the actual situation was something different to what was actually written down. The notional contract being such a ephemeral beast.

And that will continue until the end client is contractually required to keep their mouth shut and nose out of other people's tax affairs.

One of the evils of IR35 is that the end client is not affected at all by the arrangements. I can guarantee that their answers would have been more guarded if the individual had been self-employed.

NeilW

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By IANTO
19th Feb 2008 12:08

IR35 v's EAT
Mike,
There were two cases against HP, and I brought one of them. Mine wasn't instigated by an IR35 challenge and the other was not either. Both cases ran parallel and the ET waited 5 months for the first case to be appealed by HP before they gave a judgement on my case. Political influence or not?

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By MikeBellisimo
19th Feb 2008 09:57

Tax and Employment
John,

ISTR it has been tried - one of the first cases was a contractor vs HP. [I cannot cite, sorry]

A long-term contract was terminated when HP cut back on expenditure. HMCE went after him for IR35 and he went after HP for employment rights. He lost both - the difference between deemed and actual.

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By IANTO
19th Feb 2008 08:37

IR35 stuff
Chris,
I think you miss the point entirely. The issue is the inconsitency in the law in this country and the political and spiteful targetting of IT professionals. I believe that the ruling classes are engaged in a long term plan to roll back the last 100 years of emancipation of the working classes, and the "professions" are helping them do this by not robustly opposing issues like IR35.

If IR35 says the individual is a "disguised employee" then the EAT should come to the same conclusion, given that the tests, except the construction of the hypothetical contract, are largely the same.

Clearly, HMG is afraid of the issues involved and so far no one person, for the same engagement has presented the issues to both courts. I am totally convinced that there was political interference in my case (J.M.Williams v.s Hewlett Packard and Certes Computing). Why else would my eminent legal team withdraw 5 days before my case leaving me to present it in the EAT myself?

The judge certainly didn't like many of the political statements I made in the case including the belief that many large organisations use contractors of all types to evade their employment responsibilities.

Incidentally, as I've reported many times in many different fora, I believe HMRC withdrew their intended challenge of me under IR35 when I lost in the EAT - they couldn't afford the political fallout of either decision of my status by the Commissioners.

IR35 is not a tax issue , it's a political issue and I continue to be fiercely opposed to it and will continue to campaign against it at every opportunity.

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By IANTO
18th Feb 2008 17:00

IR35 v's EAT

Mike,
I believe your statement

"Unfortunately it has already been well established that a ruling in favour of IR35 which is based on deemed contracts has no impact on a ruling for/against employment which is based on actual contracts." to be legally incorrect.

No one person who has been found "caught" under IR35 has then approached the ET for a judgement on the same engagement, let alone has received a converse judgement. Please correct me with specific case law if I'm wrong.

However, it is legally unlikely that this will happen. In my own case, John M. Williams v's Hewlett Packard and Certes computing, the EAT judged that I was not an employee of HP and HMRC withdrew their intended challenge of me under IR35. They could not afford to create such a legal precedent as we are discussing in this thread. It would also have been political dynamite.

So please, let's stick to the facts and not propagate opinion. It is my contention that there is no case law to support your statement.

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By MikeBellisimo
18th Feb 2008 14:47

Different Beasts
Unfortunately it has already been well established that a ruling in favour of IR35 which is based on deemed contracts has no impact on a ruling for/against employment which is based on actual contracts.

The gap that exists appears to be deliberate.

What really irritates is that "Tax doesn't have to be taxing" and yet for IR35 cases it's basically going to be impossible in many cases for a contractor to make an accurate determination at the point at which a tax return is required. The safest position is of course to pay whether or not it's actually due but that is extortion not taxation.

Ah well, at least we now all own a nice bank into which our taxes can sit earning interest until the due date.

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By IANTO
18th Feb 2008 12:39

IR35 losses
Well gentlemen, the answer to this problem is for those caught by "arbitary" and "biased " (and I understand the legal implications of that word) decisions, to sue for employment rights. I'm sure there would be some poltical gnashing of teeth if this were to be promoted and supported. Yes, I know there is a time limit for lodging such claims, but the Law should allow an out of time appeal in such cases. But then the Law is not always just!

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By mikewhit
15th Feb 2008 12:43

Additionally ...
... if the worker was indisposed for some reason, but had arranged a competent and trusted former associate to stand in, would the client manager have been so adamant that only the named worker would do ?

I don't really think so, but of course this is untestable at a hearing - however, the "reality" (as the HMRC like to put it) is probably that a competent sub would continue the work almost seamlessly. That indeed is the nature of occupation.

It also needs to be asked why the client manager was so insistent in the face of contracts to the contrary, unless it was for reason of some perceived 'what I say, goes' macho culture.

The cases reported here where HMRC won appear to show that they just keep asking different people until they get the answer they want, then use that answer and disregard the rest - not really conducive to respect for the Revenue ...

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By AnonymousUser
16th Feb 2008 13:47

Frustration
As the principal of the firm who initially handled the First Word case, before passing it on the Qdos, then Accountax, words cannot describe the frustrations stemming from the fact that it took 3 years or so for HMRC to fail in disproving the evidence that we set out in the early days of the case. "Chatham House" rules probably bar me from reporting here the conversation I held with an HMRC inspector about the case in the early days, save to say had that Inspectors pragmatic views been carried forward HMRC wouldn't have waisted time and money fighting a flawed case, and my client would have been spared nearly 6 years of fighting a tax dispute.

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