How contractor ATDSL won its IR35 case against HMRC

ContractorUK has learned that HMRC suffered an IR35 defeat in the First Tier Tribunal in 2017. The case involved a Mr Armitage, a highly-skilled electrical drawings designer with 25 years’ experience in the nuclear industry. The case was successfully argued by John Hill, who has provided the following written insight for ContractorUK readers.

HMRC originally enquired into an earlier contract with a different end-client of Mr Armitage’s, and had agreed that the contract was outside IR35. Nevertheless, they proceeded to investigate the next contract -- although both contracts were fairly generic in nature and, as far as the taxpayer was concerned, he operated in the same way on all his contract work.

Given these basic facts, and as a former tax inspector, I was surprised that HMRC then continued to argue their case against Armitage Technical Design Services Limited (ATDSL) for nearly four years, especially since a compromise offer in settlement had previously been made to HMRC and rejected.

Furthermore, in my long experience in status work, there are plenty of other contractors working out there who would have a less arguable case than Mr Armitage so I am not sure why HMRC decided to pursue this case for so long.

Factors taken into account

The FTT judges took the usual case law position of standing back and looking at the whole picture and decided that, on balance, Mr Armitage would have been regarded as self-employed if there had been a direct contract between him and his client. In arriving at their decision they took into account:

Non-exclusivity

During the period of the contract under review, Mr Armitage carried out work for other clients by deciding to branch out from his usual work and start a completely new line of business. HMRC argued that this was not material.

Equipment

Mr Armitage had invested in over £7,000 worth of equipment to service his clients and used some of his own equipment while working under this contract, although the judge commented that this was down to his personal preference as the client did provide sufficient, albeit basic, equipment for him to use.

Control

The client initially wanted Mr Armitage to work from their Head Office in Didcot but, for personal and social reasons, Mr Armitage decided to set himself up in a local satellite office belonging to the client.

However, there was no electrical design department at that site so Mr Armitage worked entirely unsupervised, although HMRC argued that as his drawings were going “up and down the net,” this indicated a degree of supervision. The tribunal judges concluded that Mr Armitage was under much less control than the employees working in Didcot.

Substitution

The taxpayer had a signed document from the client confirming that he had the right of substitution, although the client witness who attended on behalf of HMRC said that he would probably have gone back to the agency had Mr Armitage not been able to carry out the work.

In the end, the judges decided that the point was neutral. Interestingly, the inspector acting as counsel for HMRC said that she was “concerned” at the production of this document (as if it was rather sinister), but the tribunal judge concluded it was good evidence.

Mutuality

As usual, HMRC argued that case law supported their view that by the offer and acceptance of the contract, mutuality of obligations had been met. However, the tribunal concluded that the mere offer and acceptance of a contract was not a factor in support of employment and regarded it as neutral.

Penalties

In summary, the taxpayer had invested several thousand pounds in equipment; had worked for other clients during the period under review, had had his previous contract deemed outside IR35, and worked completely unsupervised.

In addition, he was not regarded as ‘part and parcel’ of the organisation as he was denied access to certain employee areas and was required to keep a note of his own hours whereas employees were on a time management system. Despite putting these  factors to HMRC, it remained their view that the taxpayer was subject to IR35 and, as well as issuing PAYE and NIC assessments, they also raised penalty notices for neglect.

Where does this case take us?

Although this was a very welcome win for Mr Armitage, it should be remembered that cases heard in the FTT do not carry the same weight as those heard in the High Court. Interestingly, however, HMRC does seem more reluctant nowadays to take cases any further than the First Tier Tribunal.

There is still a wide gap between HMRC’s view of IR35 and that of the professions; the contracting community and indeed recently, the courts. This gap is underlined by the fact that after the tribunal decision, HMRC commented that while they would accept the decision they still maintained it was wrong. However, in a finding of fact, either side is precluded from taking the appeal to a higher court.

Final thoughts

Given other recent victories for the taxpayer, it seems that the number of contractors who should be subject to IR35 is probably much lower than HMRC predictions and the CEST tool remains a fallible tool, so if you believe you have a strong case to argue, it is still worth considering taking IR35 appeals to the FTT.

With this case though, I think that, even had we lost the status argument in court, the tribunal would have found it difficult to uphold HMRC’s view that the contractor had been negligent so, at the very least I believe the penalty awards would have been set aside. Having said that, it must be remembered that the onus of proof is always on the taxpayer to show the assessments are incorrect and not HMRC.