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Relationship change causes split IR35 decision

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23rd Mar 2012
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A veteran IT contractor won a partial victory against HMRC in an unusual split decision over IR35 tax status.

The first-tier tribunal heard the case of JLJ Services Limited v HMRC in November when John Spencer, an IT contractor with more than 40 years’ experience in the industry, appealed the assessment by HMRC that he was caught effectively an employee who should pay income tax and National Insurance Contributions on his pay from Allianz Cornhill Management Services.

Through his personal company JLJ, Spencer had provided programming services to Allianz, via a recruitment company over a period of eight years.

Under IR35 rules Spencer would have been taxable as an employee if the notional contract between him and Allianz was akin to an employment contract. Over the eight-year period at issue, HMRC assessed Spencer’s total tax liability at £141,000.

Shaky Substitution Clause

One of Spencer’s main arguments for being taxed as a contractor was that the contract under which Spencer provided his services contained a substitution right, which is usually an indication of a contractor relationship.

However, the tribunal emphasised that the substitution right was not unfettered, given that the contract provided that any alternative contractor put forward by Spencer could be vetted by Allianz, noted law firmed Mcgrigors. Spencer was so specialised that it would have taken any replacement a few weeks to be productive, the lawyers added.

The tribunal said that the substitution clause had “very little reality” and had been inserted in the contract for tax purposes. In his decision, tribunal judge Howard Nolan also noted that a substitute contractor for Spencer was not offered over the seven year period.

For the first three years of the project Spencer worked on projects for Allianz, but from 2004 it became clear that Allianz wanted Spencer’s services permanently. It no longer engaged him for projects, the tribunal said.

The tribunal concluded that for the first three years of his work for Allianz Spencer was a contractor, but from January 2004 he was in effect an employee of Allianz.

“Certainly from January 2004, it would have been appropriate to regard the notional relationship as one of employment,” the judge ruled.

“We put the dividing line at 31 December 2003 because it was at that time that he was offered indefinite work, and it was from that date that renewals were agreed on an annual basis, and from which no further reference was made to particular projects.”

Paul Mason, manager of the contractor division at Abbey Tax Protection, said the ruling was unusual because IR35 tax cases are usually “cut and dried”, with all of  the work in a period under dispute either covered by IR35 legislation or not.

The tribunal ruling also showed that contractors who do general work for a client, rather than project-based work, and whose contracts are renewed every six months or year, become “part and parcel” of a client and are therefore more likely to be taxed as employees.

Replies (17)

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7om
By Tom 7000
26th Mar 2012 11:21

he still had to pay tax on the last 5 years out of 8 so I am guessing the best part of £90k. All this does is that  it just leaves uncertainty in the contractor market.

 

I cant remember, does HMRC go after him or his company. as presumably the company doesnt have this as an asset to pay HMRC. Could the company just be wound up and ltd liability relied on? Or can they persue you beyond  ''the veil of incorporation''? 

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By StevenProud
26th Mar 2012 11:30

This was our client

Very nice of Abbey Tax Protection to comment on our client at ClearSky Accounting.

Tom 7000 is correct however the agreement we negotiated with the HMRC saved our client £141,000.

I've linked to wider coverage of our press release below.

 

http://www.contractorcalculator.co.uk/contractor_avoids_tax_bill_partial_victory_ir35_401910_news.aspx

 

 

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By may2011
26th Mar 2012 11:59

Excuse me but

reducing the liability from £141,000 to an undisclosed sum is not the same as "saving your client £141,000".

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By tanyajackson
26th Mar 2012 12:57

IR35 CASE

It appears that Mr. Spencer clearly fell in to the IR35 rules and should have fessed up earlier.  Where was his tax adviser during these 8 years?  I assume that Mr. Spencer didn't prepare his own accounts and I fail to see how you can prepare accounts without noticing that the guy only had one customer for the past 8 years!

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
26th Mar 2012 13:13

Apologies @StevenProud

I'm sorry the article didn't give credit where it's due, and note from the case details that Neil Awbrey's involvement was quite clear in the decision.

I'll have a word with the writer - our usual policy is to follow up the named reprenentatives for any comment on such cases.

However, you can help us too by dropping a line about any of your tribunal (or other IR35-related) activities to editor [at] accountingweb.co.uk.

IR35 will continue to be an important issue for AccountingWEB members as well as contractors. If anyone reading this thread would like to discuss the current status of the measure (or ways to repeal/reform it), come and join our new IR35 discussion group.

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By asillahi
26th Mar 2012 14:38

Can ClearSky give more details

.....about the case. I totally agree with may2011 and I think what StevenProud is claiming by saying that they saved their client £141k is actually very misleading. I'm sure the decision will significantly reduce the original tax bill but I bet the majority of the bill still remains. What was ClearSky's advice to their client during the period of the contract? We may not have sufficient details to judge hence why I am asking Steven to provide more details although client confidentiality may be an issue.

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Replying to lionofludesch:
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By StevenProud
27th Mar 2012 12:16

Hi there

I have gone back to the team involved in this for more information and I'll post it here once it arrives.

please bear with me!

Thanks

Steven

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By johnjenkins
26th Mar 2012 15:23

I really don't

understand why anyone gets caught up in IR35 anymore. There are so many HMRC approved contracts out there now that nobody should even worry about IR35.

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By JCresswellTax
26th Mar 2012 16:57

All about the contracts???

I dont think contracts are the main issue now though john?

As far as I am aware, they look through the contract and how you are actually carrying out the work in practice.

Therefore, the contract isn't necessarily as important as you make out.

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Replying to scalloway:
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By IANTO
29th Mar 2012 07:47

Contracts

In my case in the EAT v's Hewlett Packard in the EAT in 2001, the judge ruled that the provisions of the contract over-rode the reality of the engagement and ruled that I was not an employee of the client. The legal system is very consistent isn't it?

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By mikewhit
26th Mar 2012 18:07

A so-called "veteran" should know the rules

Someone with such a long history in contracting should be aware of the rules and should have always been on the lookout for factors that would make him more "employee-like".

This is not something that should be down to accountancy advisors. - the onus was on the contractor as the "business manager" to proactively ensure that his IR35 status was not open to question, including but not limited to, asking to be assigned to different projects, doing offsite and/or fixed cost work and doing some work for other clients.

That said, to the uninitiated, a £141k penalty for not doing the above might seem like a harsh punishment !

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By frustratedwithhmrc
27th Mar 2012 06:24

The main issue here is "Complacency"

Having noted the comment by John Jenkins and having heard similar feedback from clients I believe that the professional contractors have become complacent about IR35 and this is leading them down dangerous paths which increase their chances of being caught by IR35.

HMRC has a valid point when it says that long running engagements are likely to change their character over time from initially being purely contracts for services (i.e. non-employment) to essentially disguised employment.

In fairness, some of the larger organizations have recognized this and after 2-years under contract the contractor is given the opertunity of a permanent role, but will not be renewed on the same basis again.

This is to prevent exactly the situation described, but also a recognition that if an engagement is likely to last beyond 2-years then it is probably not a sufficiently temporary role to be appropriate for a contract post anyway.

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7om
By Tom 7000
27th Mar 2012 11:44

disclaimer

When we send accounts out where they have only one client we put an IR35 disclaimer in the covering letter something along the lines that they need to costantly monitor their status and if they think they fall inside the rules they must let us know immmmmmmmmediately  so we can amend the accounts as its their responsibility to decide if they do or not as due to the complexity of law in this area and changing circumstances we can't. :oP

Because you dont really want your PII policy to have to pick up the bill do you?

 

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By johnjenkins
27th Mar 2012 12:34

I agree,

complacency has definately crept in. The length of time shouldn't on its own change the status. The project could last 3 years or even be one of on-going or money orientated. Certainly for any on-going contracts the status should be reviewed every year and a new contract signed accordingly.

If you look at it, IR35 shouldn't even exist that is why there are HMRC approved contracts.

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By SimonP
28th Mar 2012 17:27

I'm baffled!

The main article talks about 5 years out of 8 being caught but the press release (link provided via Steven Proud's initial posting) refers to 4 years out of 7.

So, which is right? This article or the news report?

It is no wonder there is so much confusion over IR35 when even the apparently clear facts of a case cannot be correctly ascertained.

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By rampanesar
31st Mar 2012 12:39

An alternative - Contractor Solution

As I understand, the contractor solution that we use will effectively put them outside of IR35. The contractors are set up as "partners" in an offshore partnership.

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By asillahi
01st Apr 2012 05:59

@ rampanesar

How does your scheme sit in today's anti-avoidance culture? Have you had it checked out by HMRC or will you be ticking the anti-avoidance scheme box on the SA return? What are your fees for something like this?

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