Alternative Book Company Ltd: IT consultant loses IR35 appeal

An IT consultant who has paid self-employment taxes since 1985 has lost his appeal against IR35 and must now payout two years worth of employment taxes.

Keith Shepherd, director of Alternative Book Company Ltd, even took on three external commercial roles during his seven years supplying IT skills to credit insurer Gerling NCM.

Typically, such freelancing is at odds with direct employment, suggesting that IR35, set up to curb the tax perks of contractors who supply services more like employees, should not apply.

But Mr Shepherd's 'non-Gerling' work accounted for just £6,800 out of his firm's total turnover of £180,000 between April 2000 and April 2002, the period HMRC deemed IR35 to apply.

Finding in the department's favour last month, Special Commissioner Michael Tildesley ruled Mr Shepherd was "content to await the offer of another contract" during the disputed period.

Experts say that his failure to look for alternative work near to the end of his contracts implied that, like an employee, the IT contractor would accept whatever work Gerling provided.

Further satisfying 'mutuality of obligation,' a signpost to employment, was the fact that the contractor could be moved to other projects, while protected by a four-week notice period.

Although he challenged claims to the SC that he could be moved from role to role at Gerling, Mr Shepherd previously told HMRC that he would not be "left idle" at work.

At the hearing, he tried to insist he wasn't at his client's disposal, saying he accepted work only if it met his needs. The SC didn't buy this argument, saying he "preferred" the evidence to the contrary.

This evidence came from Stephen Prentice and Derek Gigg, two IT managers at Gerling, the latter of whom was right when he claimed Shepherd became "part of the scenery" at the firm, the SC said.

Reflecting on their evidence, which conflicted with Shepherd's but not the Revenue's, the SC said the Oracle and programming expert became an "integrated" feature of the IT department.

The SC explained that he sided with the accounts of Gigg/Prentice because their claims were consistent with the terms of the lower and upper level contracts.

Between 2000 and 2002, Shepherd failed to market his firm as a provider of IT services, and of the three projects he took on outside of Gerling; he actually worked on just one of them.

Moreover, the SC found Mr Shepherd's established tax treatment as a self-employed person did not prevent him from being an employee of Gerling, and, overall, was of "no significance".

"I find no compelling evidence that the Mr Shepherd was in business on his own account during his engagement with Gerling NCM," the SC concluded in his judgement, published last week.

"Mr Shepherd was integrated within the IT department of Gerling NCM. He worked there for seven years…generally as a member of team, which included employees.

"As with other members of staff working on IT projects, he was required to make progress reports and submit his work to the quality assurance team."

Helping to prove the worker was subject to 'control', a key indicator to IR35, Messrs Gigg and Prentice said he needed their permission to take leave, which Mr Shepherd denied.

Both the managers explained that, to meet the 36 hours a week that Gerling was expected to supply, Shepherd was expected to work during the core hours of 0930 to 1130 and 1400 to 1530.

Again, Mr Shepherd fought their claims. However there were just 13 occasions in the disputed period when these core times were missed, most of which were flouted only marginally.

"Mr Prentice accepted that Mr Shepherd could choose his own start and finish times outside the core hours," the Special Commissioner wrote in his judgement.

"However, this was no different from that which applied to employees under the flexible working staff policy."

Other signs indicating control included the contractor being subjected to monthly reports – "the same as those [that] applied to Gerling's employees working on IT projects," the SC said.

Like employees, Mr Shepherd was required to attend Gerling's offices in Cardiff, and while he did work from home, the time he actually spent away from the workplace was minimal.

Unlike much of the evidence presented, Mr Shepherd accepted this. He denied outright, however, claims by Mr Gigg about his 'right to substitute', which is as significant factor in determining if IR35 taxes apply as 'control.'

Evidence showed that Mr Gigg signed a statement about substitution, effectively giving ABC Ltd the right to replace Shepherd with a suitably skilled replacement if he became absent.

Yet the SC noted Mr Gigg "distanced himself" from the statement and, crucially, it was dated 2005, meaning any conditional allowance to substitute was outside the period under investigation.

Moreover, ABC Ltd "did not have the capacity to provide" a replacement because Mr Shepherd was its sole employee; in addition, the suggested substitute was about to retire.

According to the lower and upper level contracts dated April 3, 2000, a substitution clause permitting ABC Ltd to supply the services through a consultant other than Mr Shepherd was absent.

As a result, the SC said substitution was "improbable and conceived just to avoid IR35," therefore such "window dressing" would not be in any hypothetical contract between worker and client.

Shepherd himself appears to have nailed his own coffin tightly shut given he previously told HMRC he inserted the substitution clause to move his assignment away from "falling within IR35."

Inspectors' eyes must have lit up even more when he said that in practice, Gerling would "tolerate his absence" and allow him to continue his contract upon return.

Not only does this further satisfy the mutuality element of IR35, but it also helped the SC conclude that financial risk for Mr Shepherd was, overall, "absent."

He was paid hourly and his earnings were fixed during the duration of each contract; he was provided all the IT kit needed for his work and he admitted he would not rectify any work-related mistakes in his own time.

However he worked with no holiday and sick pay, no pension scheme and no entitlement to redundancy or legal recourse in the event of unfair dismissal. He also funded his own IT training.

"[The] interesting point was that the SC found that although he [Shepherd] was not entitled to any employee-type benefits the fact he was paid double the amount an employee would get more than compensated for any loss of benefits," said Kate Cottrell, of IR35 advisory Bauer & Cottrell.

"It looks like we again have a situation where the end client evidence is at odds with the contractor's view of the engagement. Indeed it also seems that there are lots of discrepancies everywhere."

Simon Sweetman, the former tax chairman of the Federation of Small Businesses, agreed that evidence from Gerling representatives seemed to surprise Mr Shepherd at the hearing.

"This was very much a case that turned on its facts - he worked at the same desk and for the same client for over six years and this was held to embed him into the business," he said of Mr Shepherd.

"It also cannot have helped that the contractor and the client openly disagreed at the hearing about the terms of his engagement … [yet] it is not I think likely to have wider application".

Another tax expert, who also specialises in IR35 but was not at the hearing, said the case seemed weighted in the Revenue's favour from the start because the contractor gave the department ammunition.

She said: "The contractor appears to have forgotten what he had said before [to HMRC] and the Special Commissioner kept bringing him back to these points [suggesting] that some preparation was lacking [on the IT contractor's behalf]."

Summing up, Special Commissioner concluded: "Under the contextual circumstances I found that Mr Shepherd was not exposed to significant financial risk from his engagement with Gerling NCM.

"Mr Shepherd was part of the scenery at Gerling NCM. There was no compelling evidence that Mr Shepherd was in business on his own account during his engagement with Gerling NCM.

"His established tax treatment as a self-employed person did not prevent him from being an employee of Gerling NCM and [is] of no significance in the light of all the circumstances.

"I find that the hypothetical contract would have the necessary irreducible minimum to constitute an employment contract. When I stand back and consider the position as a whole I conclude that the picture painted of the relationship between Gerling NCM and Mr Shepherd was overwhelmingly one of employment."

Wednesday 4th Jun 2008