Four key Tax Tribunals give contractor market a shot in the arm

The contractor market has received a much-needed shot in the arm this year following four First Tier Tax Tribunals that ruled in favour of contractors in IR35 cases. 

MBF Design Services Ltd, ECR Consulting Ltd, Marlen Ltd and  Primary Path Ltd won hard earned victories over HMRC, following enquiries that lasted  between five and eight years. The average amount of tax and NIC that HMRC had assessed was £50,000.

In each case the judge explained that the purpose of the tribunal was to create a hypothetical contract between the worker (the individual freelancer) and their end clients to ascertain whether the contract would be one of service (employment) or one for services (self-employment). 

The facts of the case were set out starting with consideration of the written contracts between client and agency (the upper contract), and the lower contract between agency and the contractor’s company (which is the ‘intermediary’ for the purposes of the IR35 Intermediaries legislation). 

However, the Judge in MBF noted discrepancies in the contractual paperwork, and in ECR there was reference to unsigned documents, albeit he accepted that the agreements had been acted upon and so he treated the agreements as valid and determinative for the purposes of the appeal. 

On the question of paperwork, in Marlen the purchase orders from the agency to the contractor referred to “the provision of engineering resource support” and further as “mechanical design engineering expertise or checking expertise”; i.e. not immediately identifiable as job titles.

It is not helpful when assignment letters congratulate the individual on getting his\her assignment rather than acknowledging that it is the company which has been awarded the engagement. 

In each of the cases, taken by IR35 specialists Accountax, much store was set by the substitution clauses which were in the Upper Contracts.  In ECR and Marlen the judges observed that the Client would have returned to the agency under the substitution clause for them to supply another contractor with sufficient, skills, qualifications and experience. 

In Primary Path the judge he took issue with HMRC in its approach to hourly paid work arguing that for someone of the contractor’s skill and expertise a monthly salary in an employment contract would be more appropriate. 

He felt hourly rates were a feature of the charging structure of both professional firms and skilled tradesmen and if they pointed in any direction – it was away from employment.

Much has been made of the fact that all these contractors were seen to be ‘in business’ which is an indicator of being an independent contractor.

However, the three key employment status tests are control, personal service and mutuality of obligation as laid down in Ready Mixed Concrete (Southeast Ltd) v Minister of Pensions and National Insurance (1968) and consistently referred to by judges as the starting point for determining whether the contractor is self employed. 

And while all these IR35 judgements have commented that the contractor displayed levels of financial risk beyond what one would expect of an employee, these views were expressed after the judge had determined that the key tests pointed away from employment.

Key points

- it is vital that the terms of both upper and lower contracts must be consistent – a point drawn out from Primary Path

- ensure that everything is properly signed by all parties

- it is important to ensure that at all times the business relationship between agency and the company is acknowledged

- these cases have proved to be great news for freelancers and have generally reflected well on the agencies involved. 

- however, one should not be fooled into thinking that HMRC will change tactics

- general HMRC enquiry activity is on the increase and there is nothing to suggest thatIR35 will be ignored

- therefore agencies must continue to ensure that their paperwork is spot on and freelancers must remain on their guardc

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