IR35 Case Study – Luck of the Draw

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As IR35 specialists who have been defending contractors for the best part of two decades, we have dealt with a number of different HMRC status inspectors in our time, explains Qdos Contractor.

Whilst inspectors are supposed to be impartial, objective and only interested in ensuring that the correct amount of tax is collected, attitudes amongst them can vary. Some status inspectors seem to be on their own personal crusade and adopt the attitude for which HMRC were severely criticised in the 2006 Special Commissioners case of Lewis t/a MAL Scaffolding. The Commissioners suggested that in effect, HMRC had wanted to find the contractor as inside IR35 for their own purposes and then set out to justify their conclusion. The following statement should not be taken lightly:

“HMRC appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers there if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking. They have totally failed to persuade me.”

We dealt with two very similar cases (featured below) for two clients, who were insured under their Tax Liability Cover policies, which were quite different due to the inspector on the case. Both cases featured the same reasons for HMRC to close the case, yet because each inspector drew separate conclusions from the initial response, one contractor was left with a 13 month long case full of stress and the inability to dissolve their company, whilst the other could continue as normal within only 3 months of the initial enquiry letter.

Download our guide on How to Survive an IR35 Enquiry here, which includes more insightful case studies, common pitfalls, and real life questions asked by HMRC.

Case Study A

In the first case, the contractor’s company provided engineering services within the oil & gas industry and had ceased trading on 31.07.13, and made application to be struck off the Companies House register once final accounts to 30.06.14 had been drawn up.

In July 2014, HMRC opened an IR35 enquiry into the period 01.01.12 – 30.06.14. Qdos issued a response the following month, providing HMRC with all the information requested but also pointed out that the company had ceased to trade a year previous and that the company was devoid of any assets.

Included in the response was a reminder to HMRC of the case of Larkstar Data Ltd v HMRC (2008) where the contractor decided to retire and not contest HMRC’s appeal so as to protect his family from further stress. Thus, by the time the appeal was heard by the Special Commissioners there was only £129.79 left in the company’s bank account. HMRC were therefore left impotent in terms of collecting the resultant PAYE & NIC liability following their successful appeal. Therefore, even if our client was to concede that IR35 applied, how would HMRC collect the PAYE tax & NIC?

HMRC did appear to take notice and the IR35 team at Crawley, who tend to be more pragmatic than their colleagues in the other teams around the UK, agreed that the contracts fell outside of IR35 in October the same year.

Case Study B

For the second case, the contractor’s company provided management & IT consultancy services to a large telecommunications company. The business had only started in 2010 when in October 2014, HMRC’s IR35 team in Bradford launched an IR35 enquiry for y/e 05.04.14. All opening information was provided and as in the above, Qdos made the same analogy to the Larkstar Data Ltd case, as the PSC had ceased to trade and the contractor had moved into full time employment. Consequently, an application had been made to dissolve the company, which was being held up by HMRC’s objection whilst they conducted their enquiries.

The client had undertaken their IR35 diligence by having the company’s contracts and working practices reviewed, and deemed outside of IR35. The contractor declined the invitation to meet with HMRC to discuss their working practices, and so all of this information was provided via electronic correspondence. After reviewing all of the information, the inspector decided 6 months after opening the enquiry that they wanted to discuss the working practices with the end client.

Months passed without HMRC being able to arrange a meeting with the end client until Qdos lost patience with the Revenue’s ineptitude and lodged an official complaint in August (4 months after the inspector had initially decided to meet with the end client). This had little effect as the Complaints Team simply supported the officer handling the enquiry.

In November 2015, HMRC finally met with the end client and a month later opined that the contracts fell outside of IR35.


  • D.DERBY says:

    Probablyhude3 99.9% of all IT contracts are inside IR35 so why all the discussion? If you can’t supply a substitute, you are inside IR35. Never had a contract and know of no one in IT who has had a contract that allows you to sent a substitute in your place.

  • Madhu says:

    I do agree with Derby. IT industry is not a construction industry if one labor is sick send an alternative. No client in IT industry accepts a substitute as the substitute person requires clients business knowledge & applications knowledge, which itself takes time to understand. The client can’t afford to such time & money.
    So the substitution in IT industry is meaningless word.
    It looks like the HMRC people who are drafting the rules around IR35 … don’t really know each & every industry how they work.
    First they need an education in this respect, before they act.

  • Tony says:

    D.Derby – I’ve been contracting over 20 years and in my experience most contracts do in fact have a reasonably good substitution clause. If the contractor attempted to exercise the clause and the client refused then the client is in breach of contract – but the clause was still there.

    Also, there was a case not long ago where a contractor with no notice period at all was found outside IR35. The judge said no notice was incompatible with employment.

    It’s all a load of rubbish anyway. 95% of the contractors I know have never paid it. A bad law dreamed up by incompetents; amazing it hasn’t been done away with yet but I guess that indicates our leaders inability to come up with something fair.

  • GTB says:


    Your statement shows complete lack of IR35 knowledge and understanding. The fact that you have never had a contract probably explains why.

  • Ying Tong says:

    If you think about it for a moment, it’s not difficult to make a substitution that isn’t disruptive. I’ve done it at least twice.

    What worries me about HMRC now is that they’re increasingly behaving with the lawless chicanery which they object to.

  • The Q says:

    The state sector is a breeding ground for “jobsworth Nazis” , and the Inland Revenue the worst of them. So no surprise that how any IR35 enquiry sagas play out is luck of the draw on the tax officials assigned (much like which referee is assigned for a football match) .

  • Soprano says:

    Derby is either completely ignorant of IR35 or a troll. 84ROS is but one relevant criterion; there’s 2 others, much as hector would love to reduce it to a subsection of D&C. The whole thing is a sham that has outgrown its original purpose and is rendered void, anyway, by the dividend tax. Qdos and others win rates also don’t support the ‘all IT contractors are inside’ malarkey anyway, even assuming the legislation was something other than arbitrary criteria dreamt up by out of touch dilettantes.

    However, by all means, don’t let that get in the way of ignorant commentary.

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