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IR35 grudge match
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Northern Light IR35 case: Post-match analysis

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HMRC pulled off a £70,000 win in an upper tribunal IR35 case this month. Seb Maley from Qdos looks at the lessons accountants can learn from the verdict.

2nd Jul 2021
CEO of Qdos
Columnist
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In one of two recent IR35 appeals to the upper tier tribunal, HMRC mounted a successful defence, leaving contractor Robert Lee with a tax bill of more than £70,000.

The case relates to Lee’s personal services company Northern Light Solutions [2021] UKUT 134 (TCC). In February last year Lee went to the first tier tribunal to challenge HMRC’s opinion that his contract with Nationwide Building Society belonged inside IR35.

This initial appeal was rejected, leading Lee to attempt at overturning it again, this time at the UTT. However, the judges largely agreed with the conclusions drawn in the FTT, which took the view that the contract didn’t include a genuine right of substitution, that mutuality of obligation (MOO) existed and Nationwide held substantial control over the working relationship.

This means the engagement effectively ticked all the boxes for an inside IR35 contract. But was it so cut and dried? And what can accountants take away from a tribunal win for HMRC?

Contract must reflect working practices

A major issue for Lee was that his contract included substitution, which suggests on the face of it that he didn’t provide a personal service, like employees do. But while many contractors have won IR35 cases in the past due to their right to sub in another contractor when required, substitution actually contributed to Lee’s defeat.

This substitution clause hadn’t been exercised. Notes from a meeting between HMRC, Nationwide and the agency that had placed the contractor also showed that neither the client nor the recruiter believed that substitution was realistic - due to the security checks needed and the understanding of what was required to deliver the services.

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Replies (9)

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By Mike Nicholas
05th Jul 2021 10:17

Interesting decision, and good article.
The article says "It’s no secret that HMRC believes that contractors have been abusing the IR35 rules for years, in the mistaken view that nine in 10 who ought to be operating inside IR35 aren’t – or at least weren’t before the arrival of reform in April." Indeed, the stats for using CEST since Nov 2019 seem to suggest that roughly half of contractors are subject to IR35.

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By MartinLevin
05th Jul 2021 10:33

The "security" aspect is concerning. Consider where a contractor offers strictly private and confidential consultancy services. In the Health Service, there are specialists who provide Occupational Health services, and often are allocated a room in a paying-client's building. No-one is allowed access to this room, and as the contents are very confidential and are kept under lock-and-key, but the engager has no control over the adviser, will that person be singled out as "an employee", and so brought within IR35?

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Replying to MartinLevin:
Maytuna
By DJKL
06th Jul 2021 17:09

That security/confidentiality extends to a lot of work done for HMG and of course is backed up by the signing of the OSA.

My son contracts (software developer) though these days I have no idea who his actual "employer" is, whether he sub contracts for some intermediate entity, and how he is remunerated, what I do know is that some of the software projects he has been involved with have involved secure rooms with laptops used solely for the project left in said secure rooms at all times.

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Replying to DJKL:
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By MartinLevin
07th Jul 2021 10:15

"the signing of the OSA". What's OSA?

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Replying to MartinLevin:
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By dstickl
16th Jul 2021 16:09

Maybe OSA = The worker signing some "non disclosure etc" form/s in accordance with the Official Secrets Act 1989, etc.

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By johnjenkins
05th Jul 2021 11:06

Great article. "Everyone has to sing from the same hymn sheet". I have always said a "contract for services" has to be strictly adhered to.
As the FTT are now looking at the business of the person as well as the contract I don't think that "substitution" is now that important. It would be interesting to know if Tribunals are using a de minimis of other contracts when deciding employment status.

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By Jdopus
06th Jul 2021 08:48

I know it's old news at this point but I am still shocked when I get reminded that the solution we ended up at to the problem of large companies refusing to hire employees, ending people's PAYE employment and forcing them to serve as subcontractors was to punish the contractors themselves, make them liable for all the taxes and let the employers/large companies off completely free of any liability.

Good article though.

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Replying to Jdopus:
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By dstickl
16th Jul 2021 10:57

Why should you be shocked, SHOCKED, at such asymmetry, please - because:
1- Under the 'long forgotten' and unused Section 5(1) of the Criminal Law Act 1967, it is a crime to accept money in return for withholding information which could be of "material assistance" in prosecuting an offender. This was a codification of the old Common Law offence of Misprision of Felony - a law that is still applied in its original form in other countries, without the constraints found in British statute law.

2- I submit that the law was wrong to target victims who accepted the money [possibly under an NDA "Non Disclosure Agreement"], but that perpetrators and their lawyers who offered it, and negotiated the Non-Disclosure Agreement, could only be liable as accomplices.

NB Zelda Perkins' footnote [webpage: http://data.parliament.uk/WrittenEvidence/CommitteeEvidence.svc/Evidence... , in the section subtitled Amendments of the Criminal Law ] reads: once upon a time in Britain, and still in countries with primitive legal systems, wealthy men could escape punishment for assault and rape by paying compensation to victims or their families. As part of our civilising process, these actions became regarded not only as injuries to individuals but to society, demanding exposure and punishment. So the judges created a law - called 'Misprision of Felony' which made it a crime to pay to cover up a serious crime. Misprision was abolished by parliament in 1967, and replaced by Section 5(1) of the Criminal Law Act, which makes it an offence to accept money in return for not disclosing criminal behaviour. Lawyers negotiating such agreements should be liable as secondary parties. The law carefully allows agreements which provide for making good anything the victim has lost, such as her employment, and for her to receive "reasonable compensation" for her injury. But anything more than that, which under the terms of the contract could be perceived as "hush money".

SUM-UP: For the avoidance of doubt, in my opinion, the asymmetry that should greatly trouble any … Equalities Committee … is that it seems to me to be that :

(A) It’s fully illegal to accept such "hush" money, but

(B) It’s not very illegal to offer such "hush" money; so

(C) That is - ahem - Unfair surely ? Or have I misunderstood the current position in English law - as so many victims might have?

Doesn’t English law need to be clearer about the balance of power here, too, please?

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By TonyRedondo
30th Jul 2021 11:49

Shouldn't this article be added to the IR35 casebook? https://www.accountingweb.co.uk/content/ir35-casebook

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