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IR35: Consultant wins case over DWP work

An IT contractor has defeated HMRC at tax tribunal after the Revenue deemed his company liable for £243,000 under IR35 legislation.

2nd Dec 2019
Independent employment tax adviser
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Richard Alcock supplied IT services through his company RALC Consulting Ltd to the Department of Work and Pensions (DWP) and Accenture, which HMRC asserted should be caught by IR35.

The case (TC07474) ended up at first tier tax tribunal (FTT), which concentrated on three specific aspects: mutuality of obligation (MOO), substitution and control.

There was significant discussion at the FTT on the point of mutuality of obligation, which is surprising because the considered view of HMRC is that it is not a relevant factor for tax purposes, and MOO is not considered in the CEST test.

As with all IR35 cases, the tribunal had to weigh up all the factors and decide whether a hypothetical contract between the worker (Alcock) and the end client (DWP or Accenture), would have the qualities of an employment contract or not.

The FTT made the following observations on the basis that the hypothetical contract was in place:

No MOO

There was no mutuality of obligation between Alcock and DWP and Accenture expressly stated this in the contract.

There was no obligation for Accenture or DWP to provide a minimum amount of work (number of days or hours) to Alcock during the course of the contract or thereafter.

There was only an obligation for both Accenture and DWP to pay Alcock if work was offered and undertaken. Alcock could refuse to accept work from each, but if he unreasonably failed to accept work offered the contract could be terminated.

Termination

No notice was required to be given by DWP and 30-days’ notice by Accenture to Alcock. Notice could be given without reason.

No paid notice would be given from either client nor would Alcock have the right to claim payment for work done outside of the cancellation of the contract. The contract could be cancelled at any time for any reason.

Substitution

There was a fettered substitution clause in both the Accenture and DWP contracts, such that each client had the ability to consider and decide whether to accept substitutes offered by Alcock based on the suitability, qualifications and expertise of the substitute.

Control

There was no significant control over what work Alcock performed and how he did so within the specific Accenture and DWP’s projects for which he was contracted, so long as he enabled the ultimate outcome to be delivered in collaboration with their teams.

Alcock was to collaborate with his clients to agree the best way to deliver those parts of the project for which he (or his team) was responsible.

Hours worked

Work for both Accenture and DWP was conducted mainly within business hours for an average of 40-45 hours per week, but the contract specified a working week with variable hours and provision to provide variable cover, in case Alcock was indisposed.

Alcock had to give advance notice to both clients of any holidays or non-working days he was taking, but that notice could not be unreasonably refused.

Place of work

The work was conducted by Alcock at the clients’ offices unless working at home or outside reasonable hours.

Alcock had to inform his clients of when he was working from home but they could not unreasonably refuse to let him do so.

Exclusivity

Alcock was permitted to work for other clients during the course of contracts with both Accenture and DWP so long as this did not interfere with the delivery of his projects within each of their assignments.

Employee benefits and obligations

Alcock was not entitled to sick pay, paid holiday or pension entitlement from either Accenture or DWP.

He was also not required to attend internal meetings at his clients which were not specific to the delivery of his specific projects and had no financial responsibilities, accountability or obligations for either DWP or Accenture.

Part of the organisation

Alcock did not hold himself as working for either DWP or Accenture. There was no intention that they should be considered his employer. Alcock could not represent, deputise or act on behalf of the clients.

Alcock had no responsibility or obligation for training himself or others. He had no HR, pastoral or wider management responsibilities than those necessary to collaborate on projects. He was not subject to nor responsible for disciplinary procedures for either DWP or Accenture.

Pay

The contracts for DWP and Accenture were for fixed terms and based upon delivery of specific projects rather than filling specific job roles or positions.

The pay was at an agreed daily rate of pay, which left Alcock to deliver the projects, effectively and efficiently.

Making good

Alcock was liable in certain circumstances in negligence to the Accenture and DWP for errors committed and in relation to DWP, and he had to remedy any errors at his own cost. Alcock paid for his own professional indemnity insurance.

Decision

The decision was made in favour of the taxpayer on the balance of the evidence, but that decision could come under the microscope if the case is taken to appeal at the upper tribunal to determine whether the right weight was applied to the particular facts.

We don’t know if HMRC will appeal this decision. However, I am sure this will not deter HMRC from taking cases where there is a possible IR35 failure.

Tribunal rules

It is important for those who take cases to tribunal to follow the rules on the use of experts and the submission of documents, as demonstrated by three points in this case:

  • HMRC said it may consider the issue of carelessness to be in point if the contractor had failed to seek professional advice or that the accountant acting for the contractor did not carry out a review of the contractual terms under which his client had been engaged.
  • On the day of the hearing, the taxpayer tried to submit additional evidence in the form of emails but these were not accepted as evidence as they had not been provided within the timeframe permitted under rule 15 of the Tribunal Procedure (First-tier) (Tax Chamber) Rules 2009.
  • The taxpayer had intended to call a person to act in the capacity of an expert witness on IR35, but the judge did not believe the person concerned was qualified to give such an opinion.

Replies (24)

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By Justin Bryant
04th Dec 2019 11:32

The finding of fact that there was no obligation to provide work within the contractual periods was enough for the FTT to allow the appeal as that was clearly equivalent to self-employment status. The other factors were considered for the sake of completeness it seems, so were obiter.

One wonders if HMRC fell into the error of believing their own propaganda re MOO in deciding to take this case.

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By C Graham
04th Dec 2019 10:30

Contractors need to be recognised and defined in their own right rather than have to prove they are not 'disguised employees'.

Total regard should be to change the regulations and to recognise there IS a difference between contractors and employees - not that contractors might really be employees.

at present these cases are based on a hypothetical employment contract. Ie, an imagined or suggested contract.

You cannot be an employee without being entitled to the statutory benefits. They are statutory - not hypothetical! So how can there ever be cases where no benefits are paid but an employee/er situation is suggested. And contractors get no protection under employment law.

A contractor is not an employee because he/she retains full control of the working situation (without detriment to the services being provided) and all contracts have some form of obligation - ie deliver something in return for payment. But no statutory obligations unlike under normal employment.

IR35 attacks small businesses and entrepreneurs, goes against employers (who do not necessary want the added liabilities of employing for specific or niche services/knowledge) and continues to cost the taxpayer in failed legal cases.

IR35 = IS RUBBISH

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Replying to C Graham:
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By IANTO
04th Dec 2019 10:50

"You cannot be an employee without being entitled to the statutory benefits" which is what I've always claimed since the inception of IR35.

The problems with IR35 were exacerbated by representative organisations trying to push the "genuine" contractor ideology.

There are still many that claim that unless you are IBOYOA, then you are caught by IR35. IBOYOA in their eyes is having multiple direct contracts with multiple clients, continually seeking new work, have business premises, have a website and business cards, etc. etc.

However, it's quite possible to have an outside contract where none of these conditions exist. This is because the status tests are related to MOO and SDC, which can often be in the contractor's favour, even if none of the so called IBOYOA provisions are present.

Some representative organisations haven't done the contractor community much good with this approach I'm afraid.

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By IANTO
04th Dec 2019 10:40

Note also that Alcock had used CEST to determine that the contract was outside of IR35, but HMRC tried to block submission of this evidence, without stating what their reasons were. They were over ruled of course, but this demonstrates the lie that they will abide by the result of CEST.

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Dave Chaplin
By Dave Chaplin
04th Dec 2019 11:00

This is the case I defended, with Chris Leslie leading it. The witness who was going to give IR35 evidence, was actually me, and it was the CEST assessments and analysis I did for Richard Alcock. The judge in the preliminary hearing didn't allow me as witness, because I was not a "witness of fact" - which is correct in law - it had nothing to do with qualifications! But the CEST analysis was allowed. So, instead of being a witness, I worked the case with Chris for months, and we defended Richard in court for the week of the tribunal. And as I said elsewhere, all the evidence we used was the evidence we used in the CEST analysis - which HMRC had rejected. The promise to "stand by" was wholly debunked by the RALC case. QED.

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Replying to davechaplin:
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By IANTO
04th Dec 2019 11:03

well done that man!

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Replying to davechaplin:
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By C Graham
04th Dec 2019 18:02

interesting - the judge talks about 'witness of fact' - ie that fact is relevant in case where they base everything else on 'hypothetical' employment.

Statutory employment benefits are fact. Hypothetical employment is, by definition that it is described as hypothetical, not fact.

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Replying to C Graham:
Dave Chaplin
By Dave Chaplin
05th Dec 2019 06:16

"Not a witness of fact" is a legal phrase meaning - the proposed witness was not there at the time, witnessing the actual situation from which facts can be gleaned. For example, you were not a witness of fact when Guy Fawkes planted his explosives, but you may have an opinion about it.

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By dgilmour51
04th Dec 2019 11:22

It bothers me that HMRC point to 'not employing an expert' as evidence of slovenliness.
What they are actually saying is that the law is such a mess that the man in the street cannto rationally interpret it.
The requirement to 'employ an expert' is tantamount to a compulsory tax on people wishing to arrange their affairs within [this particular aspect of] the law.
It is bad enough that in UK there is no mechanism for individuals to be made aware of 'the law' [esp. changes thereof] and yet their responsibility is not to be ignorant.
The whole thing is purposely undstisfactory to the detriment of the individual and the advantage of the organs of the state ...

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By flightdeck
04th Dec 2019 11:23

Given that tax breaks on dividends are now capped at £2k, is HMRC's main issue with IR35 to do with lost NIC receipts (especially employer's NICs)?

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Replying to flightdeck:
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By IANTO
04th Dec 2019 11:38

If it were, then there would be no need for the April 2020 roll out and some other legislation would be needed to target the clients. It's all really about getting as many individuals under PAYE as possible and not about increased tax revenue, which is likely to fall in my opinion, given what the industry is doing currently.

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Replying to flightdeck:
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By mominnz
04th Dec 2019 11:40

Not only that, as HMRC is not pocketing some kind of profit, its a loss to the country when a company or individual gets around the system.

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By Tax Networks
04th Dec 2019 11:24

I'm Chris Leslie, Tax Networks Ltd:
As ever, it is always difficult to grapple with a 5 year old case if just looking at the Decision. I will respect the author as we are all reasonably competent advisers. I have my own opinions and I operate in the Tribunal arena, I also advise on Code 9s and appreciate the rules of evidence.
I will not repeat my LinkedIn posts, they are all out their to read. However, in the RALC 29/10/2019 Decision my submissions from para 253+ stand and were robust because of the fact-find.
I "adopted" Dave Chaplin, connected by Internet we logged our analysis of clauses, relevance of fact, examples and the kitchen sink.
It was not about CEST because no one in their right mind would rely on an incompetent tool.
We relied on the analysis, and witness evidence.
As an aside my Report included the CEST output as an addendum which HMRC Internal Review s.49F Conclusions Letter criticised as GIGO.
Dave could not be allowed as expert witness because both sides would have to agree, and, as he says, he was not a witness of fact.
If "we" look at para 195 of the RALC Decision there is a statement by the Tribunal that if I was working for HMRC I would be very concerned. End of.

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By mominnz
04th Dec 2019 11:38

Everyone knows and understands that IT contractors are usually disguised employees and that's the stance HMRC implied.
The rules should be changed and individuals and company's that are trying to escape by altering contracts or forming umbrella co's should be clamped down to end this game.

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Replying to mominnz:
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By IANTO
04th Dec 2019 11:43

Everyone knows and understands that IT contractors are usually disguised employees and that's the stance HMRC implied.

That is total nonsense. My contract is outside of IR35, even though HMRC would claim I'm subject to it.

I refer you to the case of J.M.Williams v's Hewett Packard heard in the EAT in December 2002 and judged by Mr. Justice Elias. The judgement of the court was that I could not be an employee of my client, despite the contract being weaker than my current contract and where many would claim I was just a BOS.

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Replying to mominnz:
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By johnjenkins
04th Dec 2019 13:55

Employment status is a commercial decision not a tax one (although indirectly there may be tax advantages (self employed) to be weighed against benefits (employed). HMRC should keep their noses out of what does not concern them. If they want more money let them put the basic rate of tax up so we can see which government spends the most.

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Replying to mominnz:
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By C Graham
04th Dec 2019 14:53

'IT contractors - usually disguised employees' - absolute nonsense!

In fact IT is an area often outsourced because certain niche skills are often temporarily required for projects. IT support is outsourced just as accountants and HR professionals are because companies get access to expertise that they do not need continually.

So where's the difference?

And trying to 'escape' what exactly?

Just as the days of commercial office leases are disappearing so is longterm payroll. Companies need flexibility of skills and want to be able to contract in as and what they need and when they need it.

Contractors provide agreed services according to their own terms and want flexibility to be self-employed - with that they do not get benefits of pension contributions, sickness or paid holiday and have to factor in gaps between contracts.

It is not a 'game' it is a professional working relationship and it works for both sides.

but agree the rules should be changed - get rid of IR35 and recognise the status of what a contractor is.

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Replying to C Graham:
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By meadowsaw227
05th Dec 2019 08:57

Whilst I agree your comment about accountants, we do not "usually" work for one organisation full time for months/years, no matter how cleverly we would write the contract if we did !

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Replying to meadowsaw227:
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By IANTO
05th Dec 2019 12:00

Not all accountants are IBOYOA. There are many who work for companies on a salaried basis.

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By meadowsaw227
05th Dec 2019 08:54

Presumably just a very very cleverly written contract ! .

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By youngloch
05th Dec 2019 16:17

The cracks are perhaps beginning to show?

I'm dealing with a BBC IR35 case at the moment and it's astonishing that HMRC are continuing to push.

The client operates totally independently with his own studios and circa £100k plus of equipment and employees and yet the latest communication from HMRC was a list of about 70 questions!

Seems in many cases they have just scooped everyone into one net and are just issuing blanket requests for information.

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Replying to youngloch:
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By johnjenkins
05th Dec 2019 16:50

Years ago HMRC would have to have had a reason to investigate. Unfortunately now they don't. However if the questions aren't written out properly (I've dealt with a few that someone has just concocted what they think) just put "I do not understand the question, please write in words that a layman would understand". Normally they come back with "you haven't answered all the questions". So the correspondence goes on backwards and forwards. However when you get to FTT these ambiguous questions get raised.

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By MC1
08th Dec 2019 13:02

Whilst the general focus is about collecting more tax, isn't the reality that the earlier payment of tax is the intention? The country needs the advancement in cashflow to balance the books for cashflow, rather than P&L, purposes.

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Replying to MC1:
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By johnjenkins
09th Dec 2019 08:53

You're quite right. What better way of getting more money upfront than putting all self-employed (in whatever guise) under PAYE. This was Gordon Browns idea and why we are in this mess. HMRC keep your nose out of what doesn't concern you.

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