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Ex-DWP IT contractor wins IR35 case appeal against HMRC

Tribunal judge rules terms of contractor's engagement with the Department for Work and Pensions means HMRC was wrong to pursue a £26,000 claim for unpaid income tax and national insurance contributions

A court has dismissed HM Revenue & Customs (HMRC) demands for £26,000 in payment from a public sector IT contractor it claimed had fallen foul of the IR35 tax avoidance rules.

The tax collection agency claimed Ian Wells’ 11-month stint working for the Department for Work and Pensions (DWP) between May 2012 and April 2013 had been incorrectly classified as an outside IR35 engagement between the two parties.

During his period, Wells provided DWP with business analyst services through a personal service company, known as Jensal Software Limited, and was paid a daily rate to assess the operational readiness of various components of the Universal Credit programme.

HMRC claimed the arrangement should have seen Wells taxed in the same way as a salaried worker rather than an off-payroll employee, making him liable to pay PAYE tax and National Insurance Contributions (NICs).

On the back of this alleged misclassification, HMRC claimed Wells owed the agency £14,658 in unpaid income tax and £12,011 in NICs, covering his time working at DWP.

Wells submitted a first-tier tribunal chamber appeal against HMRC, which was heard over several days in October 2017.

The outcome of the case was made public in a 36-page document on 16 May 2018, with Judge Jennifer Dean, who oversaw proceedings, ruling that HMRC’s assessment of the working arrangements between Wells and DWP were incorrect.

Read more about HMRC and IR35

Based on the evidence presented to her over the course of the hearing, she said there are numerous elements to how Wells worked with DWP that reinforce the fact that he worked for the department as an independent contractor, and not a salaried employee.

For further proof of that, she pointed to the fact that when Wells left the Department earlier than planned there was no claim made against him for breach of contract.

“Each contract lasted a short duration. The break between the penultimate and final contracts of approximately two weeks indicates that there was no contractual obligation for the DWP to provide continuous work,” wrote Dean.

“It was also clear from the evidence of all of the witnesses that Mr Well’s engagement did not extend beyond the specific project in respect of which his skills were required.

“Moreover Mr Wells was under no obligation to perform the work and in relation to the final contract Mr Wells terminated the final contract when a better offer presented itself.

“If it chose to abandon the project there was no contractual basis upon which Mr Wells could demand further work. I am satisfied that these factors point away from a contract of service,” said Dean.

HMRC “ill-equipped”

Tax advisory firm Qdos Contractor provided representation for Wells during the case, prompting the company’s CEO Seb Maley to claim HMRC is ill-equipped to accurately assess the tax status of contractors.

“Despite HMRC implementing and enforcing the rules, this verdict shows they can't accurately assess a contractor's IR35 status,” he said.

“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.”

Maley said the case also adds further weigh to the argument that extending the IR35 reforms beyond the public sector would be ill-advised at this time.

As previously reported by Computer Weekly, the government is currently consulting on whether private sector firms should be handed responsibility for determining how contractors should be taxed, after public sector bodies were handed similar responsibilities in April 2017.

“This case is further proof that IR35 needs simplifying, and HMRC must rethink its IR35 strategy completely,” said Maley. “Clearly, this is no time to extend public sector changes to the private sector.”

Potential difficulties

Dave Chaplin, CEO of contractor consultancy Contractor Calculator, echoed Maley’s thoughts on the matter, before going on to outline the difficulties companies are likely to face when assessing the tax status of the individuals they work with.

“If HMRC is capable of making mistakes of this magnitude how can they expect companies that hire contractors to make accurate assessments,” he said.

HMRC has been naïve to assume that asking clients to assess employment status for tax purposes was going to be easy and we have seen the disastrous impact it has had so far on the public sector. HMRC should now abandon all attempts to roll out these reforms to the private sector before further damage is done to UK Plc.”

Computer Weekly contacted HMRC for comment on the judgement and was told the agency is in the course of mulling over what its next steps will be.

“HMRC will carefully consider the outcome of the tribunal before making a decision on any future course of action,” a spokesperson said.

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This article was a major surprise to me. Not because of HMRC's lack of competence, but they way they are interpreting the public sector rules. I would have expected that if a public sector body deems a contract outside IR35 then that organisation would be liable for any tax/NI if they got it wrong (unless the contractor has failed to properly and fully disclose material facts). The process is largely that the agency/client ask the contractor for details, they run it through their assessment (CEST or whatever they choose to use) and make a decision. The contractor accepts or declines based on that decision. If that's correct then how can the contractor be liable and not the end client (or agency)? Do we need to draw up contracts that make the liability for incorrect assessment fall on them? Not that they will accept of course. What this means is that anyone who is advertising a contract as Inside IR35 and struggling to find people to accept it can just say that it's outside IR35 to attract people - since the financial hit won't be theirs, they can lie their head off. Depressing. The law is a total ass these days. I'm already making plans to move out of IT into another business.
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Looks like another attempted dive by HMRC / DWP similar to the infamous Elderkins v. Hindmarsh case (tax inspectors assessing each other).
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