How contractor business Marlen Ltd beat IR35

Marlen Ltd v HMRC

Published yesterday (July 14th, 2011), the judgement in this IR35 case reveals that HM Revenue & Customs issued decisions on January 28th 2009 but that it took an additional two years to reach the Tribunal.  The determinations go back eight years to the 2003/04 tax year (and up to 2006/07) , making it likely that HMRC’s investigation into Gary Hughes and Marlen Ltd started sometime in 2007, writes former tax inspector Kate Cottrell, at The Office of Tax Simplification and of IR35 advisors Bauer & Cottrell.

Are you taking notes?

The key point that contractors can take from this case is that they should keep records of the differences in terms for employees and themselves.  Issues highlighted as significantly in favour of the taxpayer were:

  • Two contracts were terminated early, one by the client, JCB, and one by Mr Hughes.
  • Client employees had to take their holidays at shutdown times whereas Mr Hughes worked over the shutdown
  • Employees had to work fixed hours but Mr Hughes more or less came and went as he pleased
  • When the client’s IT systems went down Mr Hughes was not paid but the employees were.

All these issues together with a strong lack of control as to the manner in which the work was done were enough to put the case outside IR35.

Similar (but also different) to an employee

This is despite the fact that Mr Hughes worked in the same way as employees of JCB; had the same skills as those employees and worked as part of a mixed team, including employees. He was still found, in reality, to be far less controlled than employees.   

Treat HMRC’s questions with care

For contractors, this case also highlights the care that needs to be taken when answering questions posed by HMRC. The Tribunal refers several times to conflict or confusion between what is set out on paper following meetings with HMRC and what appears to have happened in reality.

Beware your client’s answers

One example concerns the question asked by HMRC - “whether or not the hours of starting and finishing were fixed and if so the daily times.”  Clearly the client representative replied with the times that employees are expected to work rather than the hours that Mr Hughes did in reality work, which were quite different and down to him. 

It is often the case in IR35 investigations that clients respond to HMRC questions by giving the generic terms that apply to the workforce in general, rather than the specific details relating to the individual.

‘Non-employee hours’ worked?

Mr Hughes was able to step in to respond with another important point that contractors should consider. He had the evidence to support working different hours.  It is always worthwhile for those contractors paid a daily rate to keep a record, if only for them personally, of the actual hours if these are different to those for employees.  

Long grass, long overdue reform

We do not know what happened to this case between January 2009 (the date the decisions and determinations were made) and the date of the first hearing in January 2011. However, clearly Mr Hughes has been subjected to a further two years of anxiety and distress, waiting for his case to be decided.  Hopefully the work of the IR35 Forum, of which I am a member, and the expected improvements to the administration of IR35 will put an end to cases taking so long to resolve.

Friday 15th July 2011