The IR35 enquiry started mid-year with the usual ‘Check of Employer Records’ letter requesting standard information for the tax year just ended i.e. contract income in the period under review, together with details of the contracts and the reason why the taxpayer believed that the engagement was ‘not caught by IR35’.
There was one direct contract (i.e. no agency in the chain) between a Government Agency and the contractor’s company (“the Supplier”). The positives to be gleaned from the agreement were as follows:
- The client had identified a need for expert help and assistance in the performance and completion of a specific project, which was described to HMRC as developing and implementing a business closure plan with the prerequisite that the closure must be ‘solvent’.
- The contract allowed for the Supplier to make changes to the services without prior notification, which suggested the Supplier had control, albeit this related specifically to safety and statutory requirements.
- Whilst it became evident that the engagement required the contractor’s personal service, this nevertheless, underlined the fact that the contractor had specialist skills which the end client’s organisation did not possess. So much so that the contractual terms should have reflected this.
- There was clear financial risk: invoicing with no guarantee of payment, requirement for the Supplier to provide liability insurances at 50% higher than standard market requirements; indemnify the end client against tax & NIC liabilities; there was also a genuine risk of litigation.
- The Supplier was free to undertake other engagements.
- The daily rate equated to annualised fees of c£125K. This point is important based on Judge David Porter’s comments in the Tribunal case of ECR Consulting Limited v HMRC  UKFTT 313 (TC) where he noted that the client’s Project Team Leader was on a salary of £30K whereas Miss Richardson’s company (ECR) was charging fees ranging from £85K to £135K p.a. and, in his opinion, this was not consistent with the degree of control being exercised.
However, there were matters of concern within the contractual terms:
- The notice period of 1 month (rising to 2) on both sides was unhelpful.
- The Supplier did appear to have the right to assign the contract, but the Agreement also stipulated personnel, which effectively equated to a requirement for personal service.
- The project was to “perform the duties of Executive Director of Resources as agreed between the Company and Client from time to time.”
This last point became the focus of HMRC’s argument and their conclusion that the contractor was effectively an officeholder. If they were able to make that argument stick, then IR35 would apply irrespective of any arguments that might be put forward about the key factors of whether:
- Personal service was provided by the worker;
- Mutuality of obligation existed;
- The engager had a right of control over the worker (more than should be the case over an independent contractor);
Had the contract been reviewed prior to the engagement commencing, then the wording could have been amended to reflect that the Supplier operated as something of a trouble-shooter (he did not help his cause by using the organisation’s description of ‘Interim Manager’ to describe the role) and viewed the engagement as a business-to-business relationship i.e. a role to close down the organisation, which was clearly far removed from that of an Executive Director who might have been managing and directing a going concern.
An effort was made to rectify matters by the contractor completing a confirmation of arrangements letter, but it was too late because the organisation had been abolished before the letter could be countersigned. This was disappointing because, in reality, the Supplier could decide what hours were worked and what, on a day to day basis, needed to be done. The contractor could choose to work from home where possible, though much of the work needed to be done on site due to access to systems and personnel required.
As the enquiry progressed, the contractor had to provide reams of paperwork answering questionnaires about the working practices, but rather than giving the contractor’s responses the weight they deserved, HMRC were swayed by the contractual terms and the fact that the organisation had previously advertised the post as a permanent vacancy. Even though the work as described to the Supplier was not the same as the permanent role, the organisation persisted in using the title of ‘Director of Executive Resources’ which again influenced the Revenue’s thinking. Finally, the investigating officer contacted the former CEO of the government agency for his views – a year after the enquiry had started. From the telephone interview, HMRC inferred that the role was akin to employment and argued that the contractor had filled the office of Executive Director of Resources.
Our argument was that the contractor was not an officeholder. We looked to Lord Wilberforce’s comments when the case of Edwards v Clinch 56TC376 reached the House of Lords that an officeholder “…must denote a post to which a person can be appointed, which he can vacate and to which a successor can be appointed.” The role was not the same as that of any previous Executive Director: it did not contain the same responsibilities; the role was to close down the agency; there would be no successor.
Furthermore, HMRC had not taken into account the intention of the parties – per the contract:
- “The client has a need for expert help and assistance in the performance of a specific project” (that project being the closure of the agency).
- The Company (the Supplier) has the required level of expertise and has agreed to provide the required assistance of the terms of this Agreement”
Nor did HMRC’s view take into account the basis on which the two parties operated, which was certainly NOT as had been portrayed by the CEO of the agency.
HMRC were not to be moved and so an Internal Review was requested, but to no avail. The reviewing officer was persuaded that a formal appointment was a necessary requirement of an ‘office’ based on the judgement of Scott J in Diggles v McMenamin; did not accept that the role had changed from being an office because the agency was being wound up; nor did the reviewer accept that an incumbent ceased to be an officer because he or she was the final incumbent of an office.
Based on this decision, HMRC raised determinations under Regulation 80 Income Tax (PAYE) Regulations 2003 and under Section 8 Social Security Contributions Act 1999. The question was now whether to accept the determinations and decision or to appeal to Tribunal. As there was no guarantee of overturning the arguments against being an officeholder on the basis of the contractual terms and the client’s testimony, the client chose to accept HMRC’s decision – purely on the basis of a commercial decision bearing in mind the likely costs of preparing for a Tribunal.
So what should the contractor have done differently? A contract review would have highlighted the poor wording and that the role, as incorrectly defined by the end client, carried the potential risk of being deemed an officeholder. The review would have offered suggested clauses which the contractor could have used to negotiate with his end client – and an Abbey Tax consultant could have interceded on the client’s behalf.
If the contractual terms had been amended, it would have been much easier to demonstrate correctly that the role was not one of an officeholder, but a specific project that had clear deliverables and that would end once the project was delivered. The client’s pre-occupation with the original job spec and employment references together with the poor and incorrect contractual terms led HMRC down the wrong path. The attempts to fix the situation were simply too little, too late and we are convinced that the telephone interview with the client’s CEO would have included leading questions designed to elicit answers which supported HMRC’s chosen path.
The moral – as with many things in life – is that a consultant/freelancer’s engagements need a sound foundation of a well written contract relevant to the role being undertaken and a clear understanding between end client and contractor of what the role entails. Without either of these, the argument could be lost even before the first response to HMRC.
Author: Paul Mason, National Contractor Manager
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