Can HMRC’s recognise IR35 status?

After another contractor won case against HM Revenue & Customs there is a serious doubt if HMRC can accurately recognise IR35.

Ian Wells, an IT contractor, represented by IR35 specialist Qdos Contractor has won his case against HMRC, which claimed his work fell within IR35.

Mr Wells has worked as a freelance IT contractor for around 25 years, serving approximately 20 different clients and performing around 60 different contracts in that time.

In 2012/13 Wells provided business analyst services through a personal service company – Jensal Software Ltd – via agency Capita Resourcing to the Department of Work and Pensions (DWP) which each lasted around three months.

HMRC asserted that the DWP contracts fell within IR35, and raised assessments totaling £26,669 on Jensal for the tax and NIC due in respect of the deemed salary due to Wells under the IR35 rules.

The appeal hearing took place on 4-6 October 2017, with Judge Jennifer Dean recently ruling Wells’ contract was a contract for services not a contract of service and therefore belonged outside IR35, primarily due to the absence of a sufficient degree of a right of control over Jensal’s working methods, while the judge also disagreed with HMRC’s interpretation of mutuality of obligation (MOO) – the obligation of an employer to provide work and pay for it.

HMRC argued that there was a mutuality of obligation (MOO) on DWP to provide work and Wells to accept it during the period of the contracts. However, the contract between Capita and Jensal specifically stated that no MOO was intended between the parties.

It is interesting to note that the existence of MOO is not tested at all by the HMRC’s check employment status for tax tool (CEST), which public sector bodies are supposed to use to test whether a contract lies within IR35. HMRC states this is because MOO is assumed to always be present in public sector contracts, so there is no need to test for it.

The work Wells performed at the DWP was completed long before the rules for IR35 within the public sector came into effect on 6 April 2017, and before the CEST tool was available.

“In addition to showing that IR35 cases can actually be won in court, this case will likely lead contractors, agencies and engagers to rightly ask questions of HMRC’s ability – particularly since public sector IR35 reform means the fee-payer holds IR35 liability and would be required to pay potentially colossal fines if they make a wrong decision.” – commented Seb Maley, CEO of Qdos.

He said that this latest case casts further uncertainty on HMRC’s ability to accurately recognise IR35 status.

“Despite HMRC implementing and enforcing the rules, this verdict shows they can’t accurately assess a contractor’s IR35 status. The government is serious about clamping down on what they believe to be non-compliance, but worryingly, can’t recognise whether a contractor belongs inside or outside IR35. That the individual was working on a government project simply adds to the irony.” He said that this case is further proof that IR35 needs simplifying, and HMRC must rethink its IR35 strategy completely. “Clearly, this is no time to extend public sector changes to the private sector.”

Dave Chaplin CEO of ContractorCalculator agreed, saying “This judgement together with the chaotic implementation and ongoing troubles with the IR35 legislation in the public sector reinforce the view that HMRC cannot be trusted to accurately assess status themselves nor educate hiring firms how to do it properly either.”

“With the evidence being so compelling for the contractor, including a perfectly valid right of substitution, a lack of control and insufficient mutuality of obligation, one must question why HMRC pursued this case at all. It was a complete waste of tax payers’ money and court time,” he added. “This case clearly highlights that HMRC does not understand IR35, does not understand employment status case law, and is not capable of effectively enforcing the legislation.”

Chaplin particularly notes the Judge’s clarification on the key employment test of mutuality of obligation, or MOO. The ruling contradicted the recent claims put forward by HMRC that all contractors are caught by MOO, which they used to justify why they did not include it in their IR35 tool (CEST).

“HMRC should now abandon all attempts to roll out these reforms to the private sector before further damage is done to UK Plc.” he concludes.

Andy Chamberlain, IPSE’s deputy director of policy said: “This latest defeat suggests IR35 is so ludicrously complex that not even HMRC can understand it. Ian Wells is yet another self-employed person who has been pulled into a pointless, costly and drawn-out IR35 case by HMRC, only to be spat out at the end of it with a judgement that the case shouldn’t have come about at all.”

“If HMRC, with all its resources and expertise, cannot make an accurate IR35 determination, how can it expect anyone else to get it right?” He continued. “The Government must urgently reconsider any proposals to shove responsibility for determining IR35 status onto end clients.”

We can only conclude that this decision will certainly have implications for other public sector contracts, and future will show us the size of its effect.