The case was heard on 15 November 2016 but has only recently come to light because the decision was not published, as the Tribunal’s decision was issued orally and no request was made to the Tribunal for them to provide their full written findings.
The Tribunal case concerned Armitage Technical Design Services Ltd (ATDSL), which provided very specialised services with over 25 years’ experience in the nuclear industry.
Mr Armitage had appealed HMRC’s determinations that the company’s contracts with Diamond Light Source Ltd (DLS) for the years 2009-10 to 2013-14 were caught by IR35. Additionally, HMRC had issued penalties, claiming that Mr Armitage (ATDSL) had not undertaken the necessary considerations concerning whether IR35 applied to the contracts in question. Such penalties were also appealed.
The Tribunal listed all of the factors which would be considered in determining the employment status of ATDSL, which of course encompassed the usual key tests: Control, Right of Substitution/Personal service, and Mutuality of Obligation – the test which has been purposefully disregarded from HMRC’s CEST (Check of Employment Status for Tax) tool.
The contracts in question contained right of substitution clauses and Mr Armitage was of the understanding that a genuine right of substitution existed, albeit this was never exercised in practice. However, a key issue was that ATDSL were engaged because the client could not source such expertise in-house and therefore would have been able to provide a replacement if needed. The Tribunal concluded that the right was more theoretical than practical, but that it did exist to a limited degree.
On the issue of control, although the end client wished to ensure that the services were being delivered in accordance with agreed timescales, there was little control over how ATDSL delivered the work. The Tribunal therefore concluded although there was a degree of control exercised by the client; “it was not such that clearly made DLS the master.”
With regard to Mutuality of Obligation (MOO), it was clear that one party had agreed to work for the other and did so in return for payment, therefore HMRC’s limited view of MOO was in existence, however in response to HMRC’s arguments in this respect, the Tribunal commented as follows;
“HMRC’s case is that where one party agrees to work for the other in return for payment then this satisfies the mutuality of obligation between the two parties. That would be true of every contract both employment and for services otherwise the contract would not exist at all. The mere offer and acceptance of a piece of work does not amount to mutuality of obligations in the context of employment status.”
It seems therefore that The Tribunal were not wholly satisfied by HMRC’s narrow opinion of MOO. The Tribunal concluded that although the overall picture was mixed, there were more pointers towards a contract for services (self-employment) than of service (employment) and therefore that Mr Armitage would not be considered an employee.
HMRC have failed in their attempt to provide guidance that is easy to follow and to provide the correct opinions on employment status in many cases. The CEST tool is a clear example of HMRC ignoring case law and carrying on with it regardless. This case concluded whilst the CEST tool was being built.
In HMRC’s recent consultation document, they refer to an entire industry built around advising contractors ‘on how to draft contracts which create the impression that a job falls outside of the off-payroll rules.’ It is no surprise that HMRC take a dislike to businesses like Qdos Contractor who help contractors establish their true employment status, and which enable contractors to arm themselves against HMRC. It is ironic that HMRC criticise the practice of contract reviews whilst simultaneously penalising contractors for not taking due diligence.
The industry to which HMRC refers is likely to be kept very busy for some time yet, particularly if IR35 reform is introduced within the private sector and HMRC continue to ignore case law in their application of IR35.
Qdos Contractor are one of the leading experts on the IR35 legislation, successfully defending contractors against HMRC since 2000. Qdos also provide business insurance policies for contractors and freelancers.