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How do you solve a problem like IR35?

Latest Tribunal case decision & recent developments show that it’s not as easy as CEST.

The recent IR35 Tribunal case which was found in favour of the contractor MCDM; contained some surprising statements. Although surprising as it may seem it’s certainly good news for contractors. Whilst the case itself does not set a precedent for future enquiries it can be used as a reference point.

The Tribunal found in favour of the contractor because, although it agreed that STL (the end client) ‘directed’ what Mr Daniels had to do during the shifts he worked as a night shift manager, it stated that “Mr Daniels is not controlled any more than any other contractor….”

Other key factors which contributed to the contractor’s success; that there was no notice period between Mr Daniels and STL in relation to terminating the contract, and Mr Daniels was not integrated into the STL’s organisation. Interesting enough what also played a part was the fact that Mr Daniels was paid a fixed daily rate and this, the Tribunal stated, ‘points towards Mr Daniels being self-employed.’ Additionally, the Tribunal stated that; …no entitlement to any employee benefits are inconsistent with employment.”  This is at odds with the typical position in an IR35 enquiry, where being paid a daily rate and lack of entitlement to employment benefits, would have very little bearing at all.

This decision was given despite the fact that MCDM could not provide a substitute. Whilst there was a clause within the contractual terms which stated that Mr Daniels could provide a substitute, it was confirmed by the end client who gave evidence at the hearing that a substitute would not have been accepted. The Tribunal also found (and agreed with HMRC) that MCDM did not take a financial risk.

In reaching its decision, the Tribunal cited Hall v Lorimer; a special commissioners appeal case where Judge Nolan LJ stated that determining if a person is genuine in business, …”is not a mechanical exercise of running through items on a checklist…… The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered qualitative appreciation of the whole.”  This is a complete contradiction to HMRC’s Check of Employment Status (CEST) tool which is a mechanical exercise/checklist and was developed to help public sector bodies ‘accurately’ determine the status of its contractors.

One wonders what the CEST tool would make of this case, given some of the surprising statements, and the importance of the case referred to above by the Judge. After entering details of the case into the CEST tool, the conclusion was indeterminate. Perhaps demonstrating that Judge LJ Nolan may have been correct in that a prescriptive/checklist approach does not work. The failings of the CEST tool was recently highlighted in a recent select committee hearing regarding the BBC’s treatment of its freelancers, where the CEST tool was heavily criticised and found to have failed in 97% of cases.  Additionally, it has been revealed in a recent Freedom of Information Request that HMRC holds no detailed test data and therefore has no evidence to prove the accuracy of the CEST tool.

HMRC are beginning to look rather foolish and their claims that IR35 reform has been successful could now appear to be a rather bold claim, in view of the fact that such success is borne out of a tool which they cannot prove actually works.  Many contractors who are genuinely operating outside of IR35 have been forced to work inside the legislation.

HMRC appear to have completely ignored the wealth of case law which should be utilised to help us to determine future IR35 cases. Like a house of cards, it all seems to be falling apart around them and as we all thought IR35 is too complex to be solved by a multiple-choice tool which fails to fully address IR35 Case Law. HMRC need to have a re-think to restore some faith in their capabilities. The IR35 reform in the private sector may have to be put on the back burner to allow HMRC to sort out what has become a highly publicised mess.

By Contractor Weekly

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