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IR35 and Alternative Dispute Resolution (ADR)

Qdos recently assisted in an ADR meeting with HMRC.

Qdos were recently asked by a client to assist in respect of an ADR meeting arranged with HMRC. The point in dispute related to IR35. The client had two separate contracts with two separate end clients both of which HMRC argued were caught by the intermediaries (IR35) legislation. Accordingly, HMRC had also issued Regulation 80 Determinations and S8 decisions in respect of Tax and NI respectively. 

After the opening statements from both sides were read out, discussion began as to the reasons why HMRC believed that contract one was caught by IR35. They advised that in their view, the contractual clause regarding substitution was unduly fettered as it required that the substitute worker be interviewed by the end client and as such, in their view, it was highly unlikely that the end client would have accepted the services of a substitute. 

Qdos, on behalf of the client, argued that despite the contract clause requiring that any substitute be interviewed, the end client when questioned by HMRC had advised them that they would have accepted a substitute if one had been provided by the client. As such the reality of the situation was that a right to substitute existed and therefore it was clear that the contract was one for services and not one of service. In addition, when asked by HMRC if the personal service company (PSC) could have made a loss on the contract the end client advised that it could and of its own volition gave HMRC an example, stating that  the PSC could have utilised the services of a substitute and paid that substitute more than the PSC was actually being paid. Qdos argued that this totally unprompted response from the end client further supported their view that, contrary to HMRC’s view, the contract was outside of the intermediaries legislation.

Qdos also went on to state that in their view HMRC were using the contract in isolation as the basis of their argument and ignoring the end client responses as they did not suit their argument. Qdos  went on to predict that, when HMRC came to discuss the contract with the second end client, HMRC would solely rely on the end client replies and ignore the contract as it would not suit their argument, and in Qdos’ view it was a case of HMRC ‘having their cake and eating it’ - a view that HMRC strongly denied. However, when discussions began regarding the second contract HMRC did exactly that and whilst accepting that the substitution clause in the contract was not ‘fettered’ relied solely on the responses from the end client which did not fully support the client’s case.

Further discussions regarding both contracts took place over the course of the day with frequent breaks to allow both parties to hold private discussions and consider how they would like the meeting to progress. The discussions were facilitated by the HMRC mediator.

After six hours of discussions a compromise, acceptable to both parties, was reached.  It was agreed that one contract would have the deemed payment assessments totalling approximately £180,000.00 vacated and one contract’s deemed payment calculation of approximately £70,000.00 would stand.

Ultimately the client took a commercial decision thereby allowing him to put HMRC’s review behind him and instead continue with the running of his business. The alternative, had an agreement not been reached, would have been to proceed to the First Tier Tribunal for a hearing, with all the costs and continuing uncertainty that this brings.

It should be noted that the client did not accept that the second contract was ‘caught’ by the IR35 legislation and HMRC did not accept that the first contract was ‘not caught’ by the IR35 legislation. A memorandum of understanding to this effect was drawn up by the HMRC mediator and was signed by both the client and HMRC.

Although the ideal outcome would have been that both sets of assessments would have been vacated, both the client and his accountant accepted that it was a better outcome than they had expected from the ADR process and importantly resulted in closure.

It demonstrates that, even where HMRC are adamant that their view is correct, by taking any dispute to ADR it is possible with tenacity, perseverance and the right representation to reach a sensible conclusion without the need to take the dispute to Tribunal.

If would like to read more IR35 cases take a look at some of our case studies here.

By:Nigel Nordone

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