Tech contractor loses IR35 tribunal appeal: 'Right' to substitute didn't mean he could, say judges
- Reference: 1623758467
- News link: https://www.theregister.co.uk/2021/06/15/techie_robert_lee_loses_ir35_tribunal_appeal_to_hmrc/
- Source link:
Robert Lee, working as a contractor under the company name Northern Light Solutions, had challenged an earlier First-tier Tribunal ruling which found his work for the Nationwide Building Society to be "employment" for tax purposes.
But his appeal in the Upper Tribunal on 6 and 7 May failed, partly because his legal team did not convince the judges that the clauses in his contract suggesting he and the agencies had the "right" to offer a substitute IT professional did in fact mean such a substitution could happen.
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The ruling meant Lee would have to pay an additional £74,523 in income tax and National Insurance Contributions.
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The tribunal found Lee, under the terms of the "hypothetical contract", was paid a "day rate in the region of £450 and required to work a professional week, which for the Clarity Contracts is specified to be 7.5 hours a day."
A contractor or agency's right to substitute their work to another person of equivalent skill has been held as a key signal that the contractor is self-employed, rather than a "disguised employee", and thus can be considered as falling outside of the IR35 rules.
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Reforms to the IR35 off-payroll working rules, which critics argue classes contractors as paid employees without the employment benefits, were introduced in the private sector in April this year, [6]after a year's delay due to COVID-19 . The new rules put certain liabilities on employers and make it more difficult for contractors to place themselves outside the revamped tax laws. Some employers – [7] including BAE systems – have introduced blanket bans on contractors working outside IR35.
Lee worked for Nationwide through his Northern Light agency, which contracted with another agency, AxPO, which in turn contracted with the building society itself between 2012 and 2014.
What is IR35?
IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities. The latest regulation change will force medium and large private sector businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.
Those workers found to be within the scope of the legislation – i.e. inside IR35 – will have to pay more tax than they might expect, despite not receiving benefits enjoyed by full-time employees, such as holiday or sick pay, pension, or parental leave.
The reforms are part of the government's crackdown on so-called "disguised employment," where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.
Critics say that being inside IR35 is essentially "no-rights employment," meaning techies are paid and taxed similarly to regular employees but do not receive any of the security or protections that go along with permanent employment.
Contractors within IR35 can be hired and fired at will and without reason. The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line.
The implementation in that area has been described as an "utter shambles." HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.
Barrister Michael Collins, acting for Lee, had earlier argued that the "right of substitution meant that the hypothetical contracts could not be a contract of employment."
Although the First-tier Tribunal had found that there was a right to provide a substitute in these contracts, this right was qualified. The tribunal found that Nationwide would have had to agree to a substitution, and that it was under "no obligation to accept such a replacement if in [its] reasonable opinion such replacement was not wholly suitable."
The ruling said that "in practice it would be impractical for [Nationwide] to accept substitutes due to the necessary restrictions on access to [Nationwide's] systems and restricted site access. Any substitute would need to go through vetting checks and an interview and get up to speed on the project."
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The Justices found a hypothetical contract – one that would have described the agreement between Lee and Nationwide – showed that his relationship with the building society was one of employment and the tribunal dismissed the appeal.
Lessons from the case include the need to effectively describe and communicate working practices at an early stage in the relationship, according to Dave Chaplin, CEO of ContractorCalculator, a firm advising contractors on their IR35 status.
Chaplin also claimed HMRC's evidence from the notes of meetings, which underpinned several aspects of the ruling, appears to frame the facts relating to substitution in a manner that does not align with what really happens on the ground in IT projects. It was therefore important to keep a good, evidenced audit trail on projects to establish off-payroll working, he said.
"Lee's contract did include a legitimate unfettered right of substitution, but it was never exercised, and the client never gave witness evidence to back it up as a genuine right. The judges chose to disregard those substitution clauses. Substitution is no silver bullet to definitively proving a worker is not employed unless it has taken place," Chaplin said. ®
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[1] https://www.bailii.org/uk/cases/UKUT/TCC/2021/134.pdf
[2] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2YMjOnkYBXZHqmVbBaGympAAAAAE&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0
[3] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YMjOnkYBXZHqmVbBaGympAAAAAE&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[4] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YMjOnkYBXZHqmVbBaGympAAAAAE&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[5] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YMjOnkYBXZHqmVbBaGympAAAAAE&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[6] https://www.theregister.com/2020/03/17/uk_ir35_tax_reform_postponed/
[7] https://www.theregister.com/2020/02/24/bae_puts_all_contractors_inside_ir35/
[8] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YMjOnkYBXZHqmVbBaGympAAAAAE&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[9] https://whitepapers.theregister.com/
Re: Yet another push for us to all go work at Tesco
Fair point, I worked as a contractor for some years and still feel that it has its place. What really irritates me is that the government is making such a song and dance over this while failing to sort out tax laws for big business and the rich which makes contracting look like a drop in the ocean....
Re: Yet another push for us to all go work at Tesco
while failing to sort out tax laws for big business and the rich which makes contracting look like a drop in the ocean....
Well, quite. Can't have all these little oiks contracting work that should be handled by quality operations like Serco, Crapita, Tata, KPMG, Cap Gemini etc. Rather handy that the same entities that advise HMG also just happen to benefit from IR35.
But such is politics. I've generally avoided the usual suspects like the plague "Who's the client? Crapita.. Err.. no thank you". I also suspect that they've found ways to ensure that their minions are 'employed' on effectively zero hours contracts, with minimal benefits, but can be sub'd out to their clients for very agreeable mark-ups.
Re: Yet another push for us to all go work at Tesco
What really irritates me is that the government is making such a song and dance over this while failing to sort out tax laws for big business and the rich which makes contracting look like a drop in the ocean....
Quite easy to fix: contractors should start making donations to the party in power ... IR35 will recede
Re: Yet another push for us to all go work at Tesco
It is much easier for HMRC to go after a company turning over £100,000 per year than a company turning over £100,000,000
Re: Yet another push for us to all go work at Tesco
I think you might struggle to get a day rate in the region of £450 from a "normal" job with Tesco - on minimum wage you'd get less than that in a week.
Like it or not, people with "normal" jobs have been subsidising contractors' tax breaks from their considerably smaller incomes. Yes, there are bigger loopholes - and bigger subsidies - for the megawealthy, but that doesn't make it somehow OK.
Tax should be equitable and transparent, not based on who can create the most convincing legal fiction.
Re: Yet another push for us to all go work at Tesco
Tesco really?
Given he's due to pay an additional £75K in Income Tax and NI (article doesn't say if thats backdated or per year) It doesn't sound like he's exactly on the breadline, in fact this calculator https://listentotaxman.com/185000? gives a figure of £185K to pay £75K in income tax and NI, far about the average UK salary by miles, yet bleating about having to pay tax like the rest of us, here have the world's smallest violin....
Also shows how feeble an excuse nationwide's claim to being a mutual is, particularly given the pay of the board of directors (several million each) and looking more and more like nominet.
Re: Yet another push for us to all go work at Tesco
Given the length of time the case has been running the £75K probably covers several years of "employment". HMRC can go back 20 years if they believe fraud has been involved, 6 years for normal cases.
Re: Yet another push for us to all go work at Tesco
There is nothing immoral about not paying tax that you are not legally obliged to pay, even if you have arranged matters specifically in order to avoid that tax. If anything, it is the government that is immoral in demanding taxes that it promised not to impose. I'm thinking in particular of income tax, which was introduced by the UK government as a temporary emergency measure in 1799, and it was promised that income tax would be discontinued after it had paid for the Napoleonic war.
Taxation is completely arbitary. The government will demand as much as it believes it can get away with. If you pay tax that you could legally have avoided paying, you are not doing anything noble, you are just being stupid.
Cold food is VAT free but you must pay tax on hot food. Would you demand to pay tax on a cold pasty on the grounds that you intend to heat it in the microwave as soon as you get home? Surely if you don't pay tax you will be exploiting a "loophole" in the tax law, which "obviously" intends you to pay VAT if you eat the food hot? Are non-smokers as bad as Amazon in the way that they blatently avoid paying huge amounts of tobacco tax?
Looks like the new law is working as intended
Meaning that it's becoming harder and harder to be a contractor in the UK. I'm not sure whether contractors are a cause or a consequence of the low IT salaries in UK, but we can only hope those will go up.
>Any substitute would need to go through vetting checks and an interview and get up to speed on the project
So, outside IR35 status is now only reserved for unskilled labour? Most times a substitute would need to "get up to speed" - at the very least because they wouldn't know anyone in the contracting company, as well as not instantly knowing the status and work items remaining on any project being undertaken.
Drop a coder in on a half-completed project and, however skilled, they'll need to "get up to speed" just like an employee
Substitution?
This has been going on for some time and is actually a very confusing case. Lee's contract history strongly indicated he was a disguised employee, regardless of any of the IR35 specific criteria, so he was unlikely to succeed in any case. Consequently it's been a very bad test case and this decision makes it catastrophic as a precedent..
No single person consultancy can enjoy an entirely unfettered right to substitute as the client must be assured of competence, clearances and confidentiality in the substitute, and for anything other than a flying visit security passes and data access will have to be approved and organised. Consequently the ruling results in an inevitable blanket "inside IR35" decision, which is highly improper and unconstitutional.
I'm increasingly convinced that the behemoth "consultancies" must have had a hand in devising, or at least promoting, IR35 as it works entirely in their favour by squeezing out the affordable competent competition.
Re: Substitution?
If your consultancy specialises in small business, you will likely be fine, because you will have lots of customers, and while you might have regular appointments with some of them for routine maintenance, mostly you will be called out as and when needed, for example when things break down, or they want to install new software or set up a new user etc.
How to exercise substitution, with evidence:
1) Work from home one day, much easier in the current Covid climate than it once was
2) Choose to take the day off and instead substitute yourself for CoSec / CoDirector (wife, husband, partner)
3) Have them proof read your latest doc, correct spelling, correct formatting, layout and tables, maybe insert some images etc
4) Ensure they increment the document version history, with their name as the author
5) Amend your invoice for the month to include 1 day of their time and only 19 days of your time
Job done. I've done this. Silver bullet with paper trail achieved.
Possibly important:
Step 0) ensure your contract contains a clause giving you the right to substitute anyone (from your Ltd Co?) without vetting by client
I wonder what the client might make of your actions if you don't have that? (IANAL, just curious. You might be on OK grounds as the contract is between client and your Ltd Co, and it is another employee of your Ltd Co doing the work)
Yes I was assuming step 0) is you have a right of substitution.
IANAL however I don't believe a fettered one would matter as you have actually exercised it. Fettering only is an issue if you're arguing you have a right, even though you've not exercised it.
Exactly, the contract is with your LtdCo, that's the whole point. Most of us have the Missus (or whatever) on the books as well, so they're perfect for this.
I don't think you even need to take the day off yourself. Taking on additional staff at busy times qualifies. I know one person, who would occasionally get a student in for a day to help with testing network cables.
You might want to change your subject to: "How to be a Tax Cheat".
Typical
A single contractor gets a £75k bill for tax and HMRC will pat themselves on the back.
Meanwhile the work that used to go to contractors like this is going offshore (where revenue is going all over the place ti minimise what's paid in the UK) or to Umbrella Company Contractors (an unregulated sector full of companies taking the piss.)
Case in point, £37m worth of "unexplained expenses" and all the guy got was a disqualification as a company director
https://www.gov.uk/government/news/11-year-ban-for-payroll-boss-in-tax-avoidance-scheme?utm_medium=email&utm_campaign=govuk-notifications&utm_source=0847b701-2435-447c-939c-c606c2d39417&utm_content=daily
Re: Typical
> "unexplained expenses"
Pfft, booze, drugs, expensive holidays and hookers is my bet. Easily explained
Re: Typical
I think they mean
"Here's £8.91 per hour in salary [minimum wage] + plus £40,000 or whatever to cover your expenses in doing the job, without any explanation as to what those expenses might be.
In other words, they didn't spend the money at all.
Re: Typical
> Pfft, booze, drugs, expensive holidays and hookers is my bet. Easily explained
Yeah and he probably just squandered the rest! :D (Credit: George Best)
Though it seems that £37M was the total amount of cash that flowed through the company, so the total of everyone's pay too.
I'm going to go out on a limb...
...and say good. This sounds like the right judgement; and I'm no fan of HMRC.
The gentleman was an employee in any legitimate sense of the word; he was attempting to get tax relief based on an unexercised and impractical technicality, and he was spotted.
I'm contracting now, but I've had my share of years behind me working alongside contractors who were earning twice, and in one case nearly three times [1]* as much as me for doing exactly the same work with (for all practical purposes) the same contractual conditions. The argument that contractors had less job security went out of the window years ago; these days you've no more security in full employment than a contractor.
[2]* The three-times guy worked remotely from home in London - way back before this was 'normal'. He never came into the office, never met with the team, produced mediocre-at-best work (in the team's view), was eminently replaceable from a skills perspective, and yet had been with the company for 25 years. I left a good few years ago, but last I heard he was still there. He survived multiple redundo rounds, and had seen most of his team decimated around him. He stuck around like a stubborn skidmark; we all figured he was sleeping with somebody senior as that was the only remotely explainable reason for him still being there.
Not bitter AT ALL (I keep telling myself) that he found a way to rake in such a huge pile of dosh for doing very little.
[1] http://www.asterisk.com
[2] http://www.asterisk.com
Re: I'm going to go out on a limb...
Of course, as a full time employee I'd be getting notice / redundancy. As a contractor i would get very little. But other than that this seems reasonably balanced; you get a higher wage in exchange for limited job security, no pension contributions and no holiday, I don't see how this should affect the tax you pay.
Either contracting is made attractive to you because you're being paid more, and are in a financial position where you're comfortable with the risk of being let go at short notice / like the ability to leave a company at short notice, and the extra pay covers the perks you're not getting, OR you take paid employment, and the day rate for contractors go up due to supply and demand.
Yes, many large companies aren't paying their own share. Yes, that should be sorted. But that doesn't entitle you to argue you should pay less than the tax you owe.
A couple of things here I'm surprised about
1. "Hypothetical" contract? No. Ours are ACTUAL contracts. Signed & sealed. Surely calling them "hypothetical" is an error in law then?
2. Substitution: The quoted impediments to substitution - end client approval, vetting etc - also apply when the big boys provide staff. Then surely this means all of the people provided by TCS/Wipro/Crapita/Accenture/whoever are also disguised employees of the end client?
Re: A couple of things here I'm surprised about
The comment is not about the contract, but about a particular clause, the exercise of which is deemed to be hypothetical.
People employed by those outsourcing companies are typically (though not always) employees, and are taxed and pay NI as such. Their situation is therefore not comparable.
Re: A couple of things here I'm surprised about
"Hypothetical" means a contract that actually represents what is happening on the ground rather than some legal fiction drafted by a lawyer that nobody pays attention to.
Re: A couple of things here I'm surprised about
In fairness, having been an employee of a couple of the large service providers, we were pre-screened and approved for certain clients and government departments before any actual assignment materialised. i.e. screened just in case, not because we were being substituted in.
I guess he can at least ask Nationwide to pay him backdated holiday and sick pay as a result. I mean, a court of law no less found he was an employee, not a contractor.
Right?
Oh.
Yet another push for us to all go work at Tesco
Well well, if it isn't yet another push of the clever people into normal jobs. The rich get richer, the poor get poorer. Where the net is cast scoops up more and more people with each day that passes.
There's now so much legislation and gotchas that it is surely going to push people into "normal" work for larger companies that ... uh, don't pay the (morally) correct amount of tax, and ensure their offshore shareholders just get fat on the profits.
Grumble, grumble, grumble...