HMRC drops IR35 investigation into own IT contractor

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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.

The case

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.”

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

Replies

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By Matrix
01st Aug 2018 09:06

I am sure the government was quite happy to save employer's NI on the contract at the time.

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02nd Aug 2018 13:45

Yes; I bet if there was no personal service company and just the human worker here working directly as a self-employed person there would have been no HMRC enquiries.

Incidentally, some interesting observations of the relevant case law are made in these recent non-tax cases:

http://www.bailii.org/ew/cases/EWHC/Ch/2018/1986.html
http://www.bailii.org/ew/cases/EWHC/Ch/2018/1924.html

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01st Aug 2018 10:51

Interesting! Would/could HMRC take itself to court?

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01st Aug 2018 11:23

.... and it is a surprise that HMRC cannot get enough programmers to sort out its awful IT?

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01st Aug 2018 12:31

....and for those employed by HMRC (and Office for Tax Simplification)reading this - why not just drop the whole IR35 thing as more money is being wasted than gathered in. Surely uneconomic tax policies are identified by HMRC?

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01st Aug 2018 13:54

Their IT is an absolute shambles. Friends still there say webpage loads speeds can be measured in minutes not seconds and that services are very patchy.

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01st Aug 2018 15:05

Under the new rules if they had one of these now they could ask the employer to pay. So HMRC could pay itself ... win win..??

If they open a lot of these against all of their contractors they could generate billions to help the NHS

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By Dib
to Tom 7000
01st Aug 2018 17:18

...And lose most of their contractors!

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01st Aug 2018 17:17

Full marks must go to Qdos for having the courage of its convictions as they say.
Tom states that "HMRC lacked expertise in this area" that is a very interesting point. I heard that HMRC had originally taken on hundreds of IT people to do MTD but that they are all now leaving (anyone substantiate this? Anyone reading this from HMRC?)
My first thought on reading Tom's article was ... great! Another win for the taxpayer!
My 2nd thought was... what a waste of taxpayers money.

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01st Aug 2018 17:57

Not half a waste - I had a client 'caught' under IR35 in 2013/14. The 'investigation' has been going on for more than 3 years, with visits by HMRC officers to him, to his clients, to a resolution meeting...etc..etc..etc. All at vast cost to the taxpayer (ie. us)

Not my client now but the issue is still unresolved.

Meanwhile, multiple cash in hand payments to all manner of businesses go unchallenged and un investigated

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By tedbuck
02nd Aug 2018 14:23

Well IR35 never was good law and by now you would think HMRC would have seen this and given up and looked for a 'third way'. The dividend tax addresses part of the problem so they just have to move a little bit further.
I am not surprised that they pursue these cases beyond reason as they get brownie points for pulling them off but probably also get non brownie points if they have to back away.
They should just accept the situation or remake the rules, all this nonsense in the Tribunals just costs time and money to no avail. There cannot be a definitive answer because the facts are never quite the same so the whole thing is basically pointless. (Sorry I've quite forgotten whether I'm talking about HMRC, IR35 or the Treasury Lawyers.)

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By Matrix
to tedbuck
02nd Aug 2018 14:43

They are rewriting the rules which will either lead to blanket assessments in the private sector as has happened in the public sector or a reduced/expensive flexible work force.

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to tedbuck
08th Aug 2018 11:27

The reason HMRC pursue weak cases is because if they lose, the taxpayer pays the costs and if they win, the officer gets a promotion! Win-win, I think!!

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By dstickl
07th Aug 2018 15:06

Surely it was the ... No notice period either way ... aspect wot won it ?

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By dstickl
07th Aug 2018 15:07

[duplicate post deleted for brevity].

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07th Aug 2018 19:43

No Comment

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