HM Revenue & Customs (HMRC) has succeeded in quashing a £70,000 IR35 appeal raised by a contractor relating to IT-related work they did for Nationwide Building Society between 2012 and 2015.
Project manager Robert Lee had completed a series of contracts at Nationwide between 2007 and 2014 through his limited company Northern Light Solutions that had been treated as outside IR35.
However, in the view of HMRC, the way Lee worked with Nationwide meant his engagements should have been classified as inside IR35, making him liable to pay the same National Insurance contributions (NICs) and pay-as-you-earn (PAYE) tax as expected of a permanent employee at the firm.
This, in turn, put him in the firing line for a £70,000 tax demand from HMRC to cover the tax years between 2012 and 2015, which Lee appealed against, only for the tribunal judge to rule in the government agency’s favour.
In the tribunal document, dated 18 February 2020, the judge Ian Hyde ruled the working relationship between Nationwide and Lee constituted one of “employment” for a number of reasons.
“During the time of Mr Lee’s series of contracts with Nationwide, aside from the risk of not being engaged on a new contract (which happened rarely), he was not subject to any financial risk beyond that of an employee and in many respects was part and parcel of Nationwide’s operations,” the documents states.
“With a few gaps, Mr Lee has worked for Nationwide for a number of years, full-time in substantially the same project management role.”
Even so, the tribunal document notes that Lee was not responsible – as one would expect an employee to be – for managing any staff beyond the confines of whatever project he was working on, was not subject to appraisals, and was not entitled to access any staff benefits either.
Furthermore, from a mutuality of obligation (MOO) perspective, there was also no onus on Nationwide to provide Lee with further work to do should the project he was working on at the time get cancelled or be completed early.
The judge, in his summing up, acknowledged the presence of MOO, but said it was only within each contract that Lee entered into.
“Mr Lee was engaged under separate contracts with no obligation on either party to extend or renew,” the tribunal document notes.
During his time with the firm, an example of a project he oversaw was the roll-out of a new digital signage offering that enabled the building society’s customers to electronically receive and sign loan applications offered through third-party online aggregator sites.
The amount of autonomy and control a contractor has during an engagement is another factor that is used to differentiate between off-payroll and permanent employees, and it appears to have been an important factor in this case too.
For instance, the tribunal found that, while his contracts prohibited Nationwide from moving him onto other projects without his consent, the highly regulated nature of the sector the firm operates in meant his work was subject to “over-arching” controls by the firm.
“During the course of a contract, Nationwide had the right, albeit not exercised, to direct where Mr Lee worked and to require him to work a professional day,” the tribunal document states.
“Mr Lee had in practice a considerable degree of operational and personal autonomy, but was subject to overarching controls.”
Dave Chaplin, CEO of IR35 consultancy ContractorCalculator, described the case as a “timely win” for HMRC, given that it coincides with the looming onset of the IR35 reforms in the private sector.
It also, he said, should serve as a reminder to contractors and the firms that engage them about the dangers of hiring freelance workers on a long-term basis.
“Firms need to conduct correct due diligence if they are to engage contractors, and not simply engage with them as extended employees,” said Chaplin.
Even so, there are a number of elements with regard to how Lee carried out his work with Nationwide that add weight to his argument that his engagements with the firm were out of scope of the IR35 regulations.
“The decision itself is puzzling, particularly in light of the fact that it was acknowledged he had a valid right of substitution,” said Chaplin.
“Mr Lee also had control over what he worked on, with the right to refuse to be moved. That is inconsistent with employment. There appear to be areas where a [further] appeal might have a chance of success.”
Read more about IR35
- IT and engineering contractors working for National Grid are understood to be up in arms because of the utility company’s recent efforts to comply with the incoming IR35 tax avoidance reforms.
- The UK government stands accused of overlooking the toll its latest disguised employment clampdown is taking on the livelihoods of private sector IT contractors, as doubts are cast about whether the initiative will raise the £3bn tax revenue HM Revenue & Customs claims it will.
- Thousands of IT contractors are at risk of financial ruin as HMRC pursues them for tax it claims they owe on work they did up to two decades ago and were reimbursed for via loan remuneration schemes. Computer Weekly investigates.
- Self-employed workers across the UK are being locked out of work by enterprises that are enforcing blanket bans on the use of contractors to side-step the IR35 reforms, chancellor Sajid Javid has been warned.
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