This month’s Chartered Accountants Tax Case Digest examines another First Tier Tribunal (FTT) case where the taxpayer won their appeal against a tax and national insurance assessment by successfully arguing that the intermediaries legislation (IR35) did not apply. The decision in this case centred on the lack of mutuality of obligation and control within the specific circumstances.

This is the fourth case in as many month’s where HMRC has lost an IR35 case. HMRC has stated its intention to appeal this decision. Next month, we will look at a case where HMRC was successful in the context of IR35.

These cases come at a time when the rules for extending the IR35 off-payroll working public sector rules to the private sector are due to take effect from April 2020.

Background

The FTT examined an appeal by RALC Consulting Limited (RALC) against a notice of determination of PAYE and Class 1 National Insurance Contributions (NICs) issued by HMRC. The total amount of income tax and NICs payable (not including interest) in dispute was £164,482 and £78,842 respectively.

RALC is a personal service company (PSC), of which the sole director and shareholder is Richard Alcock, an IT consultant. During the tax years 2010–2015, RALC contracted separately with Accenture (UK) Limited (Accenture), a management consultancy and professional services firm, and with the Department for Work and Pensions (DWP), (the end clients), to provide Mr Alcock’s services. Mr Alcock had previously been an employee of Accenture.

Those contractual arrangements were both four-party chains between Mr Alcock, RALC, an agency and the end clients. The agency for the Accenture contracts was Networkers Recruitment Services Limited (Networkers) and Capita Resourcing Limited (Capita) (the agencies) for the DWP contract. In both cases, there was a written contract between RALC and the agency and a contract between the agency and the end client.

The two issues to be decided by the Tribunal were whether:

• Income tax and NICs were payable pursuant to the IR35 intermediaries legislation. This involved deciding whether the hypothetical contracts between Mr Alcock and the end clients would have been contracts for services and he would have been self-employed or whether they would have been contracts of service meaning he would have been employed. The burden of proof on this aspect fell on Mr Alcock; and
• The determinations for the 2010–11 and 2011–12 tax years were competent given that they were made more than four years but less than six years after the end of the relevant tax years.

Sections 34 and 36 of the Taxes Management Act (TMA) 1970 applied to the determinations. In order to fall within the extended time limit of six years, HMRC had the burden of demonstrating that there was a loss of income tax brought about carelessly by Mr Alcock, RALC or another person (his accountant) acting on his behalf.

RALC’s ground of appeal was that the intermediaries legislation does not apply because the hypothetical contracts with the end clients would have been contracts for services and Mr Alcock would have been self-employed. RALC submitted that the hypothetical contracts between Mr Alcock and the end clients would:

• Not have contained mutuality of obligation (there was no obligation to provide work, he was only remunerated if work was available);
• There was no or little requirement for personal service by Mr Alcock (there was a generous right of substitution);
• That there was not a sufficient right of control by Accenture or DWP over the way Mr Alcock was to work to indicate employment; and
• The other terms of the hypothetical contracts were inconsistent with the contracts being ones of employment.

HMRC’s case was that the intermediaries legislation did apply to the engagements. In each of those years, RALC agreed to provide the services of Mr Alcock to work full time on long-term engagements, usually at the client site, as part of the client teams delivering substantial IT projects. HMRC submitted that the hypothetical contracts would have contained both mutuality of obligation and the requirement for personal service by Mr Alcock (with a highly fettered right of substitution). There would also have been a sufficient right of control by Accenture and DWP over Mr Alcock’s work (the how, what, where, and when thereof) and the other terms of the hypothetical contracts would not have been inconsistent with the contracts being of employment.

HMRC submit that the engagements were Mr Alcock’s primary source of income during the relevant tax years. Although RALC provided the services of Mr Alcock to other organisations, those engagements were ad hoc and short-term (consistent with the contractual restrictions on outside work) and did not fall within the intermediaries legislation. In contrast, Mr Alcock had substantial and regular engagements with Accenture and DWP, which would have been contracts of employment under hypothetical contracts, at the same time as he had occasional self-employed engagements.

In respect of the second issue of extended time limits, the appellant’s case was that neither Mr Alcock and RALC nor their accountant acted carelessly in engaging in the contracts. The operation of his business and any change of circumstances in relation to the intermediaries legislation were discussed in his annual review with his accountant. Therefore, RALC contended that the PAYE tax determinations were out of time because the extended time limits under Section 36 TMA did not apply.

HMRC’s case was that RALC acted carelessly by failing to seek professional advice on the specific and relevant contract and/or their accountant was careless in failing to undertake reviews of the relevant contracts to enable them to provide such advice.

The decision to submit the relevant tax returns without applying the intermediaries legislation was made without any proper consideration of the relevant contractual terms. Therefore, HMRC submitted that the determinations were competent and within the extended time limit available.

Decision

The Tribunal weighed up all the factors and having examined the contracts, facts and circumstances set out its summary conclusion that the hypothetical contracts would provide as follows:

• There would be no mutuality of obligation between Mr Alcock and DWP and Accenture expressly stated expressly in the contract;
• There would be no obligation for Accenture nor DWP to provide a minimum amount of work to Mr Alcock during the course of the contract or thereafter;
• There would be an obligation for both Accenture and DWP to pay Mr Alcock but only if work was offered and undertaken;
• Mr Alcock could refuse to accept work from each but if he unreasonably failed to accept work offered, the contract could be terminated;
• The termination provisions of each contract would provide for no notice needing to be given by DWP or 30-day’s notice by Accenture to Mr Alcock and notice could be given without reason;
• There would be no paid notice from either client, nor would Mr Alcock have the right to claim payment for work done outside of the cancellation of the contract;
• It could be cancelled at any time for any reason;
• There would be a substitution clause in both the Accenture and DWP contracts, but it would be fettered in that each client would have the ability to consider and decide whether to accept substitutes offered by Mr Alcock based on the suitability, qualifications and expertise of the substitute;
• In relation to the Accenture contract, it would be able to refuse to accept a substitute unless Mr Alcock was unable to work;
• In the DWP contract, there would be a further right of absolute and unqualified right to veto any proposed substitute;
• There would be no significant control over what work Mr Alcock performed and how he did so within the specific Accenture and DWP’s projects for which he was contracted so long as he enabled the ultimate outcome to be delivered in collaboration with their teams;
• Mr Alcock was to collaborate with the clients to agree the best way in which to deliver those parts of the project for which he or his team was responsible;
• Any work for both Accenture and DWP was to be conducted mainly within business hours for an average of 40–45 hours per week, but the contract would specify a working week with variable hours and provision to provide variable cover, in case Mr Alcock was indisposed;
• Any work for Accenture and DWP was to be conducted by Mr Alcock at the clients’ office unless working at home or outside those hours was reasonable i.e. it did not interfere with delivery of his objectives;
• Mr Alcock would have to inform his clients of when he was working from home, but they could not unreasonably refuse to let him do so;
• The hypothetical contract would have to have a clause, which enabled Mr Alcock to perform the consultancy services in the course of each assignment for Accenture and DWP at his own premises when reasonable;
• Mr Alcock would not be required to, but could pay for commercially leased business premises with broadband, web domain, business e-mail domain, conference call facilities, etc.;
• Mr Alcock would have to give advance notice to both clients of any holidays or non-working days he was taking but it could not be unreasonably refused;
• Mr Alcock was permitted to work for other clients during the course of contracts with both Accenture and DWP so long as this did not interfere with the delivery of his projects within each of their assignments;
• Mr Alcock was to have no sick pay, paid holiday or pension entitlement from either Accenture or DWP;
• Mr Alcock was not to hold himself as working out for either DWP or Accenture. There was no intention that they be considered his employer. Mr Alcock could not represent, deputise or act on behalf of the clients;
• Mr Alcock was to carry his own professional indemnity insurance;
• Mr Alcock was not to attend DWP or Accenture internal meetings that were not specific to delivery of the projects in which he was engaged;
• Mr Alcock was not to have any responsibility or obligation for training himself or others, HR, pastoral or wider management responsibilities than those necessary to collaborate on projects. He was not subject to, nor responsible for, disciplinary procedures for either DWP or Accenture;
• Mr Alcock had no financial responsibilities, accountability or obligations for either DWP or Accenture;
• The contracts for DWP and Accenture would be for fixed terms and based upon delivery of specific projects rather than filling specific job roles or positions;
• The contracts with DWP and Accenture would be at an agreed daily rate of pay, which left Mr Alcock to deliver the projects, effectively and efficiently; and
• Mr Alcock would be liable in certain circumstances in negligence to the Accenture and DWP for errors committed and in relation to DWP he would have to remedy errors at his own cost.

The appellant’s appeal was therefore successful in the context of the intermediaries legislation as it was found that the hypothetical contracts were contracts for service, meaning he was self-employed. In light of this conclusion, the Tribunal did not need to consider the second issue.

The full judgment in this case is available from http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j11432/TC07474.pdf