When HMRC abandons an IR35 case against one of its own

Far from being intransigent and unable to say ‘yes you’re right,’ the taxman has simply given up – having pursued one of its own PSCs under IR35 for three years, writes Seb Maley of status specialists Qdos.

But arguably more remarkable than investigating a contractor for contracts he held with none other than HMRC, the status inspector in the case had ‘form.’ In fact, it was the very same inspector responsible for the farce of Jensal Software Ltd, where the HMRC official in question chose to investigate the owner of Jensal not once, but twice. Both times, the Revenue lost.

Not seeming to have learnt the error of his ways, the same status inspector selected GMPFive Consulting Ltd (GMP5), run by contractor Gary Philpot in July 2015. It was no doubt a shock for Mr Philpot to learn that his company’s PAYE affairs for the 2013/14 and 2014/15 tax year were being probed in respect of contracts he had carried out on behalf of his client, HMRC.

It would have been all the more surprising because GMP5 was under the impression that it had been providing IT test management services to HMRC (on their Foreign Account Tax Compliance Act project), because HMRC lacked the expertise internally.

In a bid to force the case, the inspector decided to take it upon himself to hold a teleconference call with three other HMRC officials (without us present), the result of which was an overruling, 'inside' IR35 determination.

Abuse of power

From this, it can be argued that HMRC is abusing its position of power, with certain inspectors pursuing cases without an objective assessment of reasonable prospects of success.

Following this tax inspector’s pursuit of Mr Philpot, our head of tax, Andy Vessey, argued that the contractor had control over the services he performed and a right of substitution. But the inspector twisted these arguments to support his ‘inside’ IR35 determination. In an attempt to avoid the matter ending up at tribunal, we sought an independent review.

Worrying for Mr Philpot, HMRC’s deemed payment calculations came to a total of nearly £59,000. However, despite both him and us waiting many months for the determination, the Section 8 NIC Decision had to be reissued, because HMRC had failed to enter the correct dates.

Impartial? Independent?

Unfortunately, when the independent review was released it simply upheld the original ‘inside’ IR35 decision. We’ve seen this elsewhere with other IR35 cases too, so it all rather suggests to us that these reviews are becoming a waste of time.

Too often, reviewing officers disregard any meaningful case law, particularly recent tax tribunal cases where their stock response is that 'such rulings do not set legal precedence and HMRC does not agree with the decision' anyhow. This calls into question the impartiality and independence of the reviews.

The status inspector then made an attempt to discourage GMP5 from proceeding to tribunal which, increasingly, seems like a decision made too lightly.

Correspondence followed, informing Mr Philpot and us of a meeting with HMRC's Commercial Directorate (responsible for contract procurement), who had confirmed the following for those contractors engaged under CL1 contracts:

  • Personal service is a requirement for the duration of the contract;
  • HMRC would not permit a substitute;
  • HMRC have the right of control over how, what, when and where the work is done;
  • Contractors are not required to provide their own equipment;
  • Other than a requirement to have sufficient insurance cover in place, freelancers are not exposed to a financial risk; and
  • No notice period either way.

Appeal, Statement & Abandonmet

Despite this correspondence strongly pointing to an ‘inside’ IR35 position, we moved to lodge an appeal with the first-tier tribunal at the end of May 2018. At this stage, the process is to simply await HMRC’s Statement of Case. Instead, HMRC announced (only weeks ago), that they would be closing the case.

Although we are pleased with this outcome, it is an odd one as HMRC’s case was stronger than that for Jensal Software. It could be that the surrender is a result of concerns on behalf of taxpayers that the taxman takes too many cases to court, or it could merely be a coincidence.

HMRC Apology?

In addition, in line with the concerns expressed by MPs and others on behalf of people affected by the 2019 Loan Charge, the stress of HMRC’s enquiry – including the Revenue’s mistakes, its prolonged deliberation and arbitrary ‘independent’ review process, was taking its toll on both Mr Philpot, and his family. He wanted his day in court but for his well-being, we’re glad he didn’t need it.

And just as he didn’t need his day in court, Mr Philpot didn’t need an apology from HMRC either. That said, one would have been nice. Yet again, the Revenue has wasted a contractor’s time, and placed him under a huge amount of unnecessary stress. The reason? It seems that -- not for the first time -- one particular tax inspector woke up on the wrong side of bed.

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