HMRC has suffered further embarrassment after the emergence of another IR35 tribunal win for a contractor


HMRC has suffered further embarrassment after the emergence of another IR35 tribunal win for a contractor in a case which suggests the taxman must have known that its Check Employment Status for Tax (CEST) tool was fundamentally flawed before it launched.

In the case of Armitage Technical Design Services (ATDS) Ltd v HMRC, engineering contractor, David Armitage, successfully appealed a tax bill exceeding £68,000. This covered a series of engagements between ATDS Ltd and Diamond Light Source (DLS) Ltd from 2009 to 2014.

  • Tribunal not convinced that any of the key employment tests were satisfied
  • HMRC’s interpretation of MOO within IR35 again rejected by Judge
  • Judgment was released in January 2017, one month before CEST went live

The judgment was first reported by Rebecca Cave for AccountingWeb today, despite being decided in January 2017, a few weeks prior to the launch of CEST. Although the Judge staunchly rejected HMRC’s notion that mutuality of obligation (MOO) applies to all contractor engagements, the taxman would go on to omit MOO from CEST, meaning it must have done so in the knowledge that the tool was legally flawed.

“This is another slam dunk for the contractor, demonstrating once again that HMRC doesn’t understand employment status,” notes ContractorCalculator CEO, Dave Chaplin. “HMRC’s position on MOO is untenable, and the fact that it has completely disregarded comments from a Judge should warrant an inquiry.”

Judge breaks down MOO for HMRC

This was another case which was notable for HMRC relying on its flawed interpretation of MOO. The taxman contested that MOO was present simply because Armitage’s company agreed to provide services to another in exchange for payment.

Unsurprisingly, this was comprehensively rejected by Judge Rupert Jones, who noted: “HMRC’s case is that where one party agrees to work for the other in return for payment, then this satisfies mutuality of obligation between the two parties. That would be true of every contract, both employment and for services, otherwise the contract would not exist at all.”

He went on to clarify: “The mere offer and acceptance of a piece of work do not amount to mutuality of obligation in the context of employment status.”

“I wonder how many times HMRC will have to get shut down in court before it begins to grasp that the ‘irreducible minimum’ does not mean MOO exists in an IR35 context,” comments Chaplin. “The Judge spelt out in the clearest terms possible that HMRC was in the wrong, yet 16 months on, the taxman is still trying to convince everyone otherwise.”

Revelation throws HMRC and CEST into disrepute

HMRC launched CEST in February 2017. A notable omission from this software, and subsequent versions, is consideration of MOO – one of three essential tests used to confirm whether someone is employed.

HMRC has since stated that this oversight was intentional, due to the taxman’s supposed understanding that MOO is present in every contractor engagement. The timing of the ruling is significant: that this judgment was released a month before CEST’s launch suggests HMRC deliberately ignored a Judge’s instructions when developing CEST, and that it is continuing to do so.

For Chaplin, this revelation brings the taxman into disrepute: “HMRC will have read this judgment and known its position was wrong, yet it went on to launch a flawed tool which has since been used by more than 750,000 taxpayers.

“Every result that CEST has handed out should now be considered void, and the tool should be withdrawn with immediate effect.” He adds: “This is a calamitous situation for HMRC, and further reinforces why the reforms should not roll out to the private sector.”

Control claims aided by confirmation of arrangements

HMRC also contested that a significant degree of control was held over Armitage throughout his engagements with DLS, and it had James Kay, a former colleague of Armitage’s, provide a witness statement to that effect. This was despite Armitage providing his services from a site in Warrington, and not the DLS headquarters in Didcot, where DLS employees worked.

While nobody was available to supervise Armitage in person, Kay stated that Armitage’s work was reviewed by an employee in Didcot, although the tribunal understood this to be little more than quality assurance, adding: “There was a reasonable degree of control over how Mr Armitage worked, but it was not such that it clearly made DLS the master.”

“The case also shows that you can’t underestimate the importance of securing a confirmation of the working arrangements,” comments Chaplin, who notes that the tribunal accepted an agreement between ATDS and DLS as proof of a lack of control over the work completed.

Parties clash over substitution clause

Armitage’s agreed confirmation of arrangements came into play once again when considering personal service. The tribunal acknowledged that DLS had signed the agreement granting Armitage a right to substitute: “Subject to the proposed replacement possessing the necessary levels of expertise, skill and qualifications required to carry out the services satisfactorily.”

Kay argued that this wasn’t enforceable in practice and claimed that DLS would seek a replacement via the employment agency if Armitage became unavailable. However, a decisive factor was that DLS had originally agreed to engage ATDS’s services from Warrington since it was unable to recruit anyone else with ATDS’s experience.

“From his previous industry contracts, Armitage was able to demonstrate that a substitute was a practical reality, while a replacement via an agency may not have been,” notes Chaplin. “Much like the Jensal case, DLS may have had a theoretical right to check the substitute had the relevant skills and reject them if they didn’t, but this was not a sufficient fetter to warrant the substitution right invalid.”

Published: Friday, June 1, 2018

Source; - contractor calculator

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