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Contractor loses second appeal in £70,000 IR35 tribunal

An IT contractor disputing a £70,000 IR35 bill has his appeal rejected for a second time 

An IT project manager contracting for Nationwide has lost an IR35 tribunal for the second time in just over a year. 

Robert Lee received a £70,000 tax bill from HMRC in relation to services he provided for Nationwide Building Society between 2012 and 2015 through his limited company, Northern Lights Solutions Limited.

The taxman claimed Lee’s contract with the high street bank fell inside IR35, meaning he was liable to pay National Insurance Contributions (NICs) and Income Tax on earnings from the assignment. 

Lee’s defence was centred on the fact that he had the right to provide a substitute, which can be key in determining whether a contract falls inside or outside IR35. 

Judge disputed right to substitute claim

He initially challenged HMRC over the bill at the First-tier Tribunal in February 2020, which was rejected. Another appeal was lodged and heard by the Upper Tribunal over two days last month (May 2021).

However, the judge dismissed this on the grounds that Nationwide had a high level of control over how Lee worked. The case notes also show the judge disputed his argument that he had a genuine right to substitute as “they would not have a laptop, nor knowledge of the work” needed to be carried out. 

Matt Fryer, employment lawyer at IR35 expert Brookson Legal, said the case highlights the “complexity and subjectivity” of IR35.

“One of the key turning points associated with this case is the apparent lack of an enforceable right for the contractor to provide a substitute,” Fryer explained.

“Whilst the contract included a valid right to provide a substitute, insufficient evidence was presented to convince the tribunal that this was enforceable.”

IR35 tribunal ‘won and lost on fine margins’

He added: “There is a misconception that a contract containing an unfettered right to provide a substitute ensures the contract is outside of IR35, even HMRC’s CEST tool alludes to this. In reality, it is important for the contract to be backed up by evidence from the working practices.”

Responding to the verdict, Seb Maley, CEO at Qdos, said: “This case was won and lost on fine margins, with many of the contractor’s terms pointing towards a genuinely self-employed relationship. So this is a surprise victory for HMRC who, let’s not forget, have a poor track record in tax tribunals. 

“While a victory for HMRC may unsettle contractors and businesses, it’s important to make clear that this case will not set a precedent – given it could have gone either way. 

“For businesses, who are now tasked with assessing IR35 status, the result also highlights the need for collaboration with the contractor when making these decisions. HMRC will always approach both parties – as they did in this case – which is why everyone must be completely aligned in their thinking.”

By Contractor Weekly

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18 thoughts on “Contractor loses second appeal in £70,000 IR35 tribunal”

  1. Gary Andrews

    Makes you want to send in a substitute occasionally just to tick a box.

    These ridiculous sets of rules evolved from Treasury being unable to define contractors as employees, because we are not!

    So they made up a bunch of fringe rules honed by hundreds of weak case verdicts, none of which stack up on their own. If it’s a points system tell us the rules, if there’s a single clause then make that clear.

    Constantly introducing ever dafter admin hoops at the expense of productive work (and tax) is idiocy. What will be the next idiotic rule? You must come to work on a horse to be in business in your own right?

    There are real world factors that need to take far greater precedence than “did you once send or think of sending someone else in your place and how can you prove it …”.

    Just for starters these are more important and measurable pointers to non-employment:
    . Own and run separate company
    . Provide own benefits (sick, holiday, training, pension, medical, redundancy)
    . Pay all these non-employee taxes: Corporation, VAT, Employers NI, Dividends

    All Bozo Johnson’s policies have the same nonsensical basis. A border that’s not a border, a protective ring that kills thousands, more sovereignty but less rights, take back control by taking away freedom, 10 weeks open 10 months shut, employees but no employment rights, more tax by making less jobs.

    How 40% of the country are still voting for these idiots I’ll never know.

    • Ray Pooley

      I don’t know where you get the idea from that this is a BoJo policy. IR35 was cooked up by Gordon Brown 20 years ago. At thje same time he started robbing pension funds to the tune of £5 billion annually. Having said that the Tories should have repealed both of these policies in 2010 when they took power after the disastrous Blair era. They didn’t.

      • Gary Andrews

        Bozo has weaponised the existing IR35 law against contractors. His government brought in new draconian clauses and the enforcers from the revenue to pay us special attention.

        Why would he do that to a healthy tax earning sector? Maybe think about that next time you cast your vote.

      • Bob

        The contractor industry didn’t collapse 20 years ago, it’s collapsing now because of the current changes to IR35.

      • Johnny

        I stopped voting Labour after they introduced the IR35 lite back then.
        Any contractor who now votes Conservative after they forced through this hard No-Deal IR35 needs their head examining.

    • Gabriel

      We’ve had slim pickings to choose from lately but why have we ended up being governed by the bastard lovechild of Mr Bean and Liberace? Everything is a calamity, paraded in front of the cameras with all the pizazz of a chorus line, like we won’t notice.

  2. Ethel Aardvaark

    If the end company made the contract unworkable so that substitutions were impossible, how are they not liable for consequent beach of contract to the tune of the fine?

  3. Anon

    Until these parasites are removed they will keep on feeding un the unsuspecting and powerless hosts. The system is designed to keep the populus weak, skint and undefended. Just like this case has demostrated.

  4. nick

    IR35 came into effect 2021 why is he being charged for 2012 to 2015.

    • Rob

      Hi Nick,
      IR35 has been in place for years. The 2021 date is the change of the liability moving from the contractor to the hiring body. HMRC can go back 5-6 years (cant remember which one it is) but they can go longer if they feel their initial investigation indicates a longer term non compliance.

    • Gary Andrews

      @Nick (as Rob says) the original IR35 law was introduced in 2000 but this government have been adding draconian extras during their time in power. In 2017 effectively blanket banning contractors in the public sector and now 2021 from the private sector.

      Additionally HMRC have been politicised to aggressively pursue contractors under Johnson. If you use a simpler law like motorway speed limits as a metaphor, under Johnson the limit would have been reduced from 70 to 30 mph. Add to that anyone approaching 20 mph would have found themselves in court for a punitive but ruinous prosecution.

    • Ray Pooley

      Don’t be ridiculous. It was implemented by Gordon brown April 2000.

    • Ray Pooley

      Don’t be ridiculous. It was implemented 20 years ago by Gordon Brown.

  5. Andrew Harrison

    I have never understood how the right to substitute was relevant to employment status. If the work depends on understanding the client’s situation then substitution is unreasonable part way through the task as the substitute would not come with the relevant knowledge. So that would rule out project managers, business analysts etc. from ever being contractors.
    I struggle to find an example where substitution genuinely distinguishes employee from contractor.

    • Ray Pooley

      There was never any reasoning behind IR35 other than the fact that Gordon Brown wanted your money. There’s no such thing as a “deemed employee”. It goes against all principles of tree trade andemployment contracts. it was also Brown kowtowing to the unions. Unions don’t like contractors because contractors don’t join unions and their union members by and large don’t like contractors gettin paid for deploying skills that they themselves don’t possess.

  6. Ray Pooley

    Perhaps the solution, during long term engagements at least, is to periodically take a break from the contract leaving a substitute sitting in your seat to demonstrate that the substitution clause is not just words on paper. At your expense of course. This would be just like taking a week or two off once a year which you would normally do anyway.

  7. Ray Pooley

    As unpopular as it may seem when IR35 was announced in 2000 I signed up to an umbrella company. Yes it hurt financially. Yes it was a capitulation that irked me a great deal. But I wanted to be able to sleep at night. I didn’t want to end up in this kind of situation. Imagine a £70K bill landing on your doormat. (shudder)

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