Heads HMRC wins on status, tails contractors lose

A new 2017 first tier Tax Tribunal case makes (very) interesting reading, as regards HMRC’s interpretation of case law and the statements made at the hearing by HMRC, writes Kate Cottrell, founder of IR35 advisory Bauer & Cottrell.

The case concerns Malcolm Tomlinson, a double-glazing salesman engaged by Window Centre (Solihull) Limited, off and on for 25 years in a self-employed capacity. HMRC decided that Mr Tomlinson was self-employed, but Mr Tomlinson claimed he was an employee and he appealed to the tribunal. The tribunal found for HMRC. The case can be viewed online.

There is a lot of evidence and findings of fact by the tribunal and this piece does not attempt to analyse the details. But the tribunal’s judgment is noteworthy in light of some current IR35 investigation cases that HMRC are taking to the tribunal. It’s even more noteworthy when viewed through the lens of only a “little control” -- and lot of light-heartedness -- in terms of how it relates to HMRC’s new Status tool. Or in fact, how it doesn’t.

What HMRC effectively says in the case on Substitution

This is only one factor, and is not decisive and you need to see if Mr Tomlinson is in business on his own account.

Mr Tomlinson could not send a substitute. But despite what HMRC says (paraphrased above from the judgement and so in italics here and throughout), its status tool for IR35 in the public sector (the ESS) does not address being in business on your own account. And in reality, in investigation cases, HMRC always claims that being in business of one’s own account is not a relevant pointer away from IR35.

What HMRC effectively says in the case on Control

The fact he had to work a rota system in the showroom were tasks that were minimal compared to his main role as a salesman.

Showroom duties and completing a holiday planner alongside the other salesmen (some employed) are not evidence of control.

There was clearly no control over the way in which Mr Tomlinson carried out his duties, as he was providing his own skilled services, as a salesman.

Control in this case is less important and anyway with Mr Tomlinson, very little control was exercised by the engager.

Control is never “less important” (page 15 of the judgment). Indeed, in some still fresh IR35 investigation cases a “little control,” as found here in the Tomlinson case, is sufficient for HMRC to claim IR35 applies, and to take cases to the tribunal.

What HMRC effectively says in the case on Mutuality of Obligation (MOO)

HMRC did not put forward any arguments on this IR35 status factor.

Usually HMRC claims that doing the work and getting paid is sufficient to demonstrate that there is MOO and therefore an employment relationship. But not here of course. Not when it’s task is trying to prove self-employment! As with the new IR35 tool, they think it’s best to stay silent on the subject of MOO.

What HMRC effectively says in the case on Financial Risk

Financial risk does not mean that there has to be the possibility of a meaningful loss.

We’re dumb-founded on this point! This is the absolute opposite of what HMRC normally claims. Time and again, we raise the issue of the financial risk of invoicing and the real risk that you (the genuinely self-employed contractor) may not be paid, unlike an employee. The need to purchase business insurances is another example, as is the risk of a contract being terminated early. HMRC consistently equates financial risk with fixed-price work or risking your own capital by buying assets or materials and usually dismisses our contentions claiming they are insignificant. Somewhat in line with this, the new status tool will only give a self-employed or outside IR35 opinion when very significant costs and risks have actually been incurred. In short, the financial-risk-hurdle has been markedly raised.

What HMRC effectively says in the case on Employee Benefits

The lack of any employee-type benefits is clear evidence that Mr Tomlinson was not an employee.

We’re dumbfounded again! Because for the second time in this case, what the tax authority asserted is the absolute opposite of its normal stance. The best you can usually get from HMRC on this subject is that employee benefits is a neutral point.

What HMRC effectively says in the case on Part & Parcel

A customer walking into the showroom would have no way of knowing that Mr Tomlinson was not an employee. HMRC said there was no reason to suppose that a customer would care whether Mr Tomlinson was an employee or whether he was self-employed.

This is a real humdinger! Contractors, just try arguing with HMRC that you are not ‘part & parcel’ of an organisation on the flimsy, arbitrary basis that the organisation’s customers do not care about your status!

HMRC made this point -- that customers couldn’t tell (regardless of whether they cared) if our man was an employee -- despite the following:

Mr Tomlinson was trained in the products used by the engager and trained in the use of credit agreements for customers. He had the engaging company’s business cards with his name and engagers email address.  All documents given to customers including estimates, credit agreements and contracts were signed by Mr Tomlinson.  He had a company laptop and some summer shirts and polo shirts with the company logo on them and his photo appeared in company adverts in local newspapers.

What the case means for contractors

So what can contractors take from this case which I, for one, will remember fondly, and not just due to the many head-scratching moments trying to make sense of HMRC’s arguments?!

One key point is that there was no written contract in place so much turned on the evidence provided by the various parties. Ultimately, the tribunal found that there were pointers to both employment and self-employment. The case was not at all clear and either conclusion was perfectly possible. It was then decided on the intention of the parties especially, as both parties had operated on that basis for 25 years.  

Unfortunately for some contractors who might like the look of HMRC’s about-turns, which it seems can be made like the flip of coin, First Tier Tribunal cases do not create case law precedent. And HMRC will no doubt say that each case is judged on its own merits. However, quoting from the case may prove helpful if you have a dispute or an unfavourable status tool result.

Jun 28, 2017