IR35 case loss turns the tables on HMRC
An independent construction contractor has won his appeal against HMRC in the second IR35 ruling to emerge in two months, adding further complexity to IR35 determinations and undermining HMRC’s employment status tool.
Hot on the heels of last month’s victory for HMRC over BBC presenter Christa Ackroyd, this latest first tier tribunal (FTT) decision is an unusual one, most notably because the majority of recent IR35 cases have gone the way of HMRC.
However, the case has divided opinion in the tax world, with some sector experts casting the verdict as a significant blow against HMRC, while others sounded a note of caution about its relevance to the slew of similar cases coming down the road.
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Constructing a case
In MDCM Ltd v Revenue & Customs, construction contractor Mark Daniels won his appeal concerning a contract covering tax years 2012/13 to 2013/14 between MDMC Ltd (Daniels’ personal service company) and recruitment agency Solutions, which provided his services to Structure Tone Limited (STL).
HMRC determined in 2016 that the contract to provide services on large construction projects should have been caught by IR35, and the service company should have paid PAYE and NIC.
However, Daniels successfully appealed this determination, with the FTT finding the engagement was correctly categorised as self-employment, and Daniels should not be treated as an employee.
The judge summarised the factors which pointed to employment or self-employment as follows:
- No substitution permitted
- Daniels took no financial risk
- Safety equipment was provided by STL
- Daniels was not controlled by STL any more than any other contractor
- Daniels could refuse to work on another site
- He was paid a fixed rate per day
- No notice period
- No sick pay or holiday pay
- No employment benefits
- No expenses paid for travel or accommodation
- He was not integrated into STL
One of the key factors in the decision centred on the fact that Daniels was not entitled to a notice period, holiday pay or any employment benefits under his hypothetical contract, and therefore would not have been an employee if he had been engaged directly.
According to RSM tax consultant Andrew Hubbard, another of the main bones of contention around the case was control. HMRC argued that the end user (STL) controlled Daniels by specifying the shift patterns he had to work and giving him instructions for the work which needed to be done.
However, the FTT concluded that in a large project there was a clear structure to the work which had to be done and that an individual working within that structure was not being controlled by the end user.
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In evaluating the overall situation, the FTT decided that Daniels was not treated as an employee and IR35 did not apply. The case shows that one factor should not override all other factors, and the relationship as a whole should be considered.
Dave Chaplin, CEO of freelancing resource site ContractorCalculator, labelled the verdict a “hammer blow” to HMRC’s IR35 case ambitions.
“This judgment suggests that a contractor who is not controlled, is paid a daily rate, has no notice period or benefits, and is not part and parcel, should not be caught by IR35,” said Chaplin.
While Chaplin believes this is good news for the contractor, he also suggested that some case law was given limited consideration in the judgment, which could leave the door open for an appeal to the Upper Tribunal by HMRC.
HMRC ‘need to be winning cases’
For IR35 expert David Kirk, the verdict does not carry a huge amount of weight in terms of the cases stacked up behind it.
“It covers little new ground,” Kirk told AccountingWEB. “The tribunal found that there was mutuality of obligation, which has raised eyebrows but is unsurprising – there generally is – and the finding that Mr Daniels was outside IR35 rested on other factors.
“The most novel one was the way that the judge looked at the kind of rights that come from employment (pension contributions, sick pay, holiday pay etc.), saying that one needs to look at what Mr Daniels would have got, were he an employee of STL. HMRC’s rather lazy argument was that he got these rights by virtue of being an employee of his own company.
“Interestingly, neither party was represented by barristers at this hearing, which indicates to me that HMRC did not consider this case to be of enormous importance either. This is a big mistake on their part: at a time when they are trying to extend the public sector IR35 rules into the private sector they need to be seen to be winning cases.”
‘Difficult legislation to navigate’
Commenting on the decision David Redfern, founder of DSR tax claims, told AccountingWEB the ruling highlights his assertion that IR35 is “unworkable” for contractors in the complex gig and contracting economy.
“This current ruling highlights just how difficult this taxation legislation is to navigate – for companies and contractors alike, the majority of whom do not have access to expert advice and have to muddle along the best they can,” said Redfern.
“For contractors in the construction and IT industries, for example, trying to avoid falling foul of HMRC is akin to tightrope walking and for this reason alone, I believe that this legislation should be revisited and reworked”
Employment status tool takedown
For Andrew Chamberlain, deputy director of policy and public affairs at self-employed association IPSE, the result also has implications for the Check Employment Status for Tax tool (CEST), which was criticised in oral evidence before MPs at the Culture select committee inquiry into BBC pay last week.
Chamberlain commented that the tool “cannot be relied upon to make correct determinations, which is why many organisations feel forced to take a blanket approach – pushing all off-payroll engagements into IR35 unfairly.”
Dave Chaplin also criticised the CEST and called for the immediate withdrawal of the tool.
“ContractorCalculator has run the case through HMRC’s CEST tool and it was “unable to determine” the status of the worker.
“This is now the case for nine out of the 23 IR35 court cases we have tested, where CEST cannot give an answer,” said Chaplin. “It is not fit for purpose and as we have seen with the BBC fiasco it facilitates widespread misclassification of workers.”
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