HMRC’s latest strategy of attempting to win IR35 cases by using client testimony to claim contractors are disguised employees appears to be failing, with Accountax Consulting chalking up another victory on behalf of a client of the Professional Contractors Group (PCG).
The contractor, who wishes to remain anonymous, was facing a £50,500 tax bill if they had been found within IR35. But they identified inconsistencies in the client’s evidence, which had formed the backbone of HMRC’s case.
According to Dan Cobelli of Accountax, who was part of the defence team with colleague David Harmer: “HMRC relied on hearsay and second-hand information. Not only did HMRC fail to establish the specific facts of this case, it subsequently failed to apply established case law principles to specific facts.”
HMRC relied on hearsay and second-hand information. Not only did HMRC fail to establish the specific facts of this case, it subsequently failed to apply established case law principles to specific facts.
Dan Cobelli - Accountax Consulting
Misleading client testimony
What became clear in this case was that HMRC’s tax investigators had received answers to their questions from a person at the client’s organisation who had very little day-to-day involvement with the contractor. Among the inaccuracies:
- HMRC believed the contractor worked on a single project, when in fact they provided services on two projects
- HMRC believed the client’s contractors would never be allowed to work from home, when in fact the contractor had worked from home
- HMRC believed that the contractor was subject to the control of the client project manager, when in fact they were not.
“Having discussed HMRC’s findings with our client it was clear that HMRC’s information was generic and inaccurate,” continues Cobelli. “Our client was able to provide a far more detailed account of the specifics of the engagement and dispel HMRC’s inaccurate statements.”
Negotiation with HMRC
The defence team wrote two key letters to HMRC once it had raised formal determinations. Cobelli sent the initial letter appealing the contractor’s position and Harmer wrote a six-page response that highlighted the strengths of the contractor’s case.
HMRC responded with a phone call to the Accountax Consulting team when the inspector explained that they had received Harmer’s letter and ‘had decided not to litigate on this matter.’ No explanation or apology was given.
“Based on the generic information HMRC possessed, HMRC would have struggled to respond to the questions posed in David’s letter”, says Cobelli. “David provided a far more detailed account of our client’s working practices and had asked HMRC to clarify a whole host of inaccuracies. In my opinion that coupled with the mounting pressure of deadlines with the new internal review procedure led to HMRC dropping the case.”
HMRC facts were inaccurate
The inspectors in this case appeared to have been more focused on the £50,500 ‘prize’ than on determining the truth of whether or not the contractor really was within IR35. Fortunately, as a PCG member, the contractor was able to defend the case using the IR35 investigation insurance provided by the industry body.
“HMRC all too often argues cases based on its own predetermined opinion and tries to ascertain facts in support of this,” explains Harmer. “The only facts in support of HMRC’s view were generic and not factually applicable to our client’s working practices.
“HMRC should always be reminded IR35 hinges on specific facts relating to the specifics of the engagement and then one applies case law tests. This was demonstrated in Ansell and [contractors] should not be so easily blind-sided by HMRC.”
HMRC strategy changes?
It would appear that over time the taxman has been changing strategies to try and find ways to prove contractors are working inside IR35.
HMRC’s initial strategy in the early days of IR35 was to focus on contractor’s contracts. As a result, contractors have learned how to have these written by using expert professional advice and assistance during the negotiation stage.
Then, HMRC moved on to the upper level contracts, those between the agency and the client, to which the contractor was not party. Contractors are now much more aware that there might be inconsistencies between upper and lower level contracts, and most take action where they can, forestalling many HMRC IR35 investigations inspections before they happen.
The current stage seems to be for HMRC to target end-user clients with leading questions desired to solicit the response they require. But this strategy appears to be unravelling, because, as in this case, the questions are often answered by client representatives who have no day-to-day involvement with contractors. In some cases, the answers provided to the taxman have come from employees who were not even working for the client at the same time as the contractor under investigation!
This latest case demonstrates not only that HMRC’s latest strategy is flawed, but also highlights the importance of contractors undertaking IR35 contract reviews before signing a contract, and then keeping up-to-date contract files and investing in IR35 investigation insurance to cover the costs of expert professional advice.