HMRC have held onto a surprise victory in an IR35 case carrying £70,000 in tax liability, after a contractor had his appeal dismissed at the Upper Tier Tribunal.
This is the second time project manager Robert Lee, who operated through his personal services company Northern Light Solutions Limited, has had his appeal rejected.
It means the original decision – which concluded that Lee should have been working inside IR35 between 2012 and 2014 while engaged by Nationwide Building Society – has been upheld.
Lee originally sought to overturn the verdict at the First Tier Tribunal in February 2020. After this was dismissed, he unsuccessfully contested the outcome once again at a two day Upper Tier Tribunal heard in May 2021.
It’s not known yet if Lee intends to escalate the case further, through the Court of Appeal.
The court notes suggest that Lee’s contract was neither clearly inside or outside IR35, as can easily be the case regarding the off payroll rules. However, it was decided that the contractor failed each of the so-called ‘key IR35 status tests’.
Lee’s contract included the right of substitution, which can be important in demonstrating outside IR35 status. But one of the issues was that this right was never exercised.
Additionally, Nationwide confirmed to HMRC that Mr Lee did not have a “unfettered right of substitution”. The recruitment agency that placed Mr Lee concurred, saying he “could not just send a substitute” who would be subject to “very strict checks” due to the nature of the financial services industry.
This – supported by the fact that Mr Lee was valued for his “specialist expertise and familiarity, gained over many years” – pointed towards a personal service and led the judges to decide that the right of substitution wasn’t genuine.
It was concluded that Nationwide ultimately had control over the way in which Mr Lee provided his services, to the extent that it wasn’t “inconsistent with a contract of employment.”
Also of importance was the control Nationwide exercised over when and where the service was delivered. Mr Lee was contractually bound to work a 7.5 hour professional day and often required to work from an office in Swindon, although there was some leeway in where the services could be provided.
The judges agreed with the First Tier Tribunal’s view that Mutuality of Obligation (MOO) existed in the working relationship albeit only for the duration of each contract.
But while there was no obligation for Nationwide to provide work beyond the length of each contract, the presence of MOO was found to be consistent with that of employment.
The judge also referenced last year’s PGMOL case, which saw HMRC lose a £584,000 tax tribunal against professional football referees last year – this particular case hinged on MOO.
However, given the PGMOL case will be heard at the Court of Appeal next month, if the judges’ view of MOO changes, it could even give Mr Lee confidence to request that his own case is reheard.
IR35 is not always black and white. Contractors unsure of a decision made by their client should have their status assessed by an independent expert, such as Qdos.
Status is decided on multiple factors and simply having the right of substitution will not ensure an outside IR35 determination. Contractors need to focus on all aspects of the legislation.
Despite the introduction of IR35 reform, HMRC will continue to police IR35 compliance among contractors, focusing on contracts held when workers carried the liability. As a result, IR35 insurance will remain important going forward.
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