HMRC has dropped a three-year IR35 investigation into one of its own contractors, amid speculation that the tax authority may be yielding to concerns about its pursuit of marginal cases.
Experts in the contracting sector expressed surprise at HMRC’s sudden decision to abandon the investigation before it came to tribunal, as the Revenue’s case seemed stronger than in the recent Jensal Software ruling (where the judge decided IR35 did not apply).
However, with the tribunal system currently swamped with tax appeals, the decision could indicate that HMRC may be more selective about the cases it chooses to take forward.
In recent weeks the Chartered Institute of Taxation wrote to the Treasury Sub-Committee to express concerns over HMRC’s apparent eagerness to litigate, even when there is less than a 50% chance of successful legal action, in contravention of its own Litigation and Settlement Strategy. Some in the contracting sector feel this criticism could also have impacted on the tax authority’s decision.
Garry Philpot, director of Essex-based company GMPFive Consulting Ltd (GMP5), had been providing IT test management services to HMRC on their FACTA (Foreign Account Tax Compliance Act (US)) project. Through his company, Philpot had been engaged because HMRC lacked expertise in this area.
In July 2015, HMRC sent Philpot an IR35 enquiry letter which notified him that the authority was investigating GMP5’s accounts for 2013/14 and 2014/15, relating to his company’s contracts with HMRC itself.
Following a response to the initial enquiry letter Philpott, a representative from Qdos Contractor and HMRC (as the regulator) met in December 2015 to discuss working practices.
In early 2016, an HMRC inspector wrote to HMRC (in their capacity as the end client) for its version of events. Qdos claims the resulting end client evidence supported Philpott’s claim that the contract was outside of IR35.
However, following a teleconference in June 2016 between the inspector and three Revenue (end client) officials, the status inspector delivered a ‘caught by IR35’ opinion in September 2016.
Philpott asked a representative at HMRC (as the end client) a number of supplementary questions which, among other things, confirmed that there was, in fact, a right of substitution, adding substance to his counter-argument.
The HMRC status inspector dismissed these claims, at which point GMP5 and Qdos asked for an independent review. According to Qdos head of tax Andy Vessey, they were not prepared to request Alternative Dispute Resolution due to the status inspector’s “lack of integrity and absolute bias”.
In November 2017, HMRC released the deemed payment calculations totalling nearly £59,000, but according to Qdos the Section 8 NIC Decision had to be reissued as HMRC had failed to enter the correct dates.
In May 2018, the independent review was released and upheld the original decision.
That same month the status inspector also informed GMP5 about a meeting with HMRC Commercial Directorate (responsible for contract procurement). According to the correspondence, the inspector had confirmed that for those contractors engaged under CL1 contracts (a framework for engaging contingent labour across government departments):
- Personal service is a requirement for the duration of the contract;
- HMRC would not permit a substitute;
- HMRC have the right of control over how, what, when and where the work is done;
- Contractors are not required to provide their own equipment;
- Other than a requirement to have sufficient insurance cover in place, freelancers are not exposed to a financial risk; and
- No notice period either way.
In spite of this new information, GMP5 and Qdos lodged an appeal with the first tier tribunal at the end of May 2018 and awaited HMRC’s statement of case.
Instead, HMRC announced that they would be closing the case.
Case raises ‘huge question marks’
Speaking with AccountingWEB about the case Seb Maley, CEO of Qdos Contractor, said it raises “huge question marks” over HMRC’s ability to recognise the prospect of success in such circumstances, and its competence throughout an IR35 investigation.
“If [HMRC] can’t work out whether a contract belongs inside IR35 or not, how are largely inexperienced private sector engagers expected to?” said Maley.
“By dropping this case, HMRC has demonstrated yet again that it is not ready to make well-informed decisions regarding a contractor’s IR35 status. And this must be considered in the ongoing IR35 consultation.”
With just one outright win in the past nine IR35 tribunals, Maley believes HMRC may be out to prove a point by winning a case.
“It was if the tax inspector was on a mission to find the contractor ‘inside IR35’ from the very start,” said Maley. “It’s as though [a] reasonable prospect of success was thrown out the window along with the responsibility that HMRC has to assess the facts of a working relationship. If anything, it reflects HMRC’s desperation to win an IR35 case.”