How MDCM Ltd beat IR35 – quick overview
We keep hearing of cases where HMRC has appointed a barrister to put their case, which is expensive and unfair to the taxpayer, so huge congratulations must go to Mark Daniels for representing himself and winning his IR35 appeal, writes Kate Cottrell of status advisory Bauer & Cottrell.
Although this is a construction industry case, the tribunal makes some very interesting comments that should prove useful for anyone arguing their IR35 position.
HMRC claimed there was control over when Mr Daniels worked through his company, MDCM Ltd, because he worked shift patterns. HMRC also claimed that he was controlled, as to how he carried out the work, as he was required to report to a Project Manager and was directed, as he was given a list of instructions on matters that needed to be done during the shift.
The tribunal disagreed with HMRC and stated that the “supervisor” only visited the site occasionally. The tribunal agreed with Mr Daniels’s claim that as a contractor, Mr Daniels was left to his own devices during the shift and the amount of control exercised was no different to that for any independent contractor.
HMRC’s old argument of contractors looking to their own limited companies for any employee benefits has been addressed in an extremely interesting way. The tribunal found that HMRC could not “dispense with this point so easily”. In other words, HMRC cannot summarily dismiss it all as a responsibility of the PSC.
It also found that the fact that Mr Daniels was an employee of his own company, with consequential rights, cannot be relevant to what goes into the hypothetical contract for deciding IR35. So rather than being a neutral point in the IR35 argument (as HMRC would treat it), the tribunal regarded it as a positive pointer AWAY from employment – as he was not entitled to benefits like staff of the client, STL, were.
The tribunal found that being paid a daily rate is a pointer towards self-employment.
The tribunal found that Mr Daniels having to pay his own travel, accommodation and other expenses was also a pointer to self-employment.
Despite having a substitution clause, Mr Daniels could not send a substitute.
This is because HMRC established that STL would not accept a substitute and that Mr Daniels said he was not in a position to send one anyway. At (37) of the judgment, Mr Daniels did not challenge any of this. It’s a typical situation actually -- the agency has the sub-clause, but the client does not agree or even know about it!
Potentially problematical for his ‘outside IR35’ defence, the tribunal found that Mr Daniels had a contract for personal services as he could not provide a substitute, and there was a lack of financial risk. Yet it was also determined that the nature of his payment arrangements -- a flat rate per day, plus no notice period and no entitlement to any employee benefits, were all inconsistent with employment. And HMRC’s arguments about control were all rejected (75).
Final thoughts / recommendations
This is a First-Tier Tribunal case and does not create case law precedent. However, in light of the recent BBC case and the current furore over the proposed roll out of the new rules to the private sector this case will have influence. We are awaiting the result of another IR35 case at the Tribunal and I wonder if there are more and if this is why the promised consultation document is so delayed.
In the meantime, contractors should strongly consider their own IR35 positions. The very best defence in an IR35 investigation is to know, and ideally have documented, the end-client’s views. Most contracts are via agencies who cannot possibly know the reality of your working practices. Do not just sit back and accept ‘IR35-friendly’ terms in an agency contract. Check them out with the end-client and ideally get such confirmation in writing. Equally make sure any direct contract accurately reflects the reality ‘on the ground.’
Taking action now means you will always be prepared. This could be enough to stop an HMRC IR35 investigation in its tracks. More importantly if you work in the private sector, you and your client will be aware of IR35 and ready for when the rules change.