HMRC Stubborness Prolongs IR35 Agony

HMRC stubbornness prolongs IR35 agony for contractors, says Andy Vessey

In the early days of IR35 enquiries, there existed a partisan attitude among some maverick Status Inspectors that ensured such investigations were long and drawn out, and tortuous for the poor contractor. This ‘they shall not pass’ position held the taxpayer in a state of limbo, unable to make future business decisions because of the uncertainty surrounding their IR35 position.

This type of sheer bloody-mindedness was heavily criticised by Dr David Williams in the case of Lewis t/a MAL Scaffolding v Revenue & Customs [2006] SPC00527 when he said: “The Commissioners appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking.”

For a period of time thereafter the IR35 scene went through a relative period of calm but those dark days have made a return with a vengeance, and HMRC are quite unashamedly pursuing contractors with little regard to the actual facts in their mission to make IR35 stick regardless. Let me provide you with some examples of my recent experiences of this behaviour to assure readers that my accusations are founded and not exaggerated.

Jensal Software Ltd v Commissioners for HMRC [2018] UKFTT 271 (TC): Many commentators were left bewildered as to why HMRC’s legal team defended this case at Tribunal. My own theory is that this was one of the first IR35 cases to be heard in seven years since 2011 and coupled with the fact that the end client was a public sector body, HMRC may well have wanted to send out a warning shot to those working within that sphere post 5 April 2017. So desperate were the Revenue to make this a bellwether case, that they even appointed legal counsel outside of their own organisation.

I represented the taxpayer from start to finish and always had confidence that Jensal Software’s contract with the Department of Works and Pensions was not caught by IR35. However, an obstinate, arrogant and blinkered Status Inspector simply stonewalled all reasonable arguments, frustrating myself and the client at each turn, and there was no choice but to allow the Tribunal to settle the matter.

Among a number of many reasons, the judge concluded that Mr Wells (director of Jensal) was not subject to the degree of control which would be necessary to constitute a contract of employment. This had been obvious throughout the investigation but the Status Inspector was not remotely interested in listening to reason, preferring instead to interpret the facts in his own unique manner.

IT contractor engaged by London Borough Council: A most diligent IT contractor, with a particular specialism, found himself at the mercy of the same Status Inspector who had overseen the Jensal Software enquiry. Enough said! Despite the council reiterating compelling and overwhelming evidence that clearly pointed towards the contract falling well and truly outside of IR35, including confirming that the right of substitution was a reality, our friendly Inspector put his hands to his ears and attempted to discredit the end client evidence.

Thankfully, a statutory review of the case led to the enquiry being dropped albeit somewhat ungraciously.

Radio broadcaster: A radio broadcaster who is currently the subject of enquiry has been subjected to complete and utter bias by HMRC. Despite the end client providing working practices evidence that supports an outside of IR35 opinion, the contractor providing their own equipment to carry out the broadcasts and also having numerous other lucrative revenue streams, the Revenue are having none of it.

These are not isolated occurrences but what appears to be a co-ordinated directive to all those working in employment status, to find a way to apply IR35 in each enquiry HMRC open. This prevailing attitude doesn’t stop there though, as even reviewing officers from HMRC’s Solicitor’s Office are upholding their colleagues original IR35 opinion when carrying out statutory reviews, by simply repeating what the Status Inspector said and adding nothing to the debate. I remain to be convinced that, when it comes to IR35, an internal review is, in the majority of cases, isn’t a fait accompli.

Litigation and Settlement Strategy (LSS)

The LSS is the framework within which HMRC resolves disputes through civil law processes and procedures in accordance with the law. It applies irrespective of whether the dispute is resolved by agreement with the taxpayer or though litigation and is designed to facilitate resolution of disputes in relation to all taxes.

In their commentary on the LSS, HMRC state: “A key part of HMRC’s overall customer strategy is to help reduce the likelihood of situations which may give rise to a dispute” and “Disputes are costly for both HMRC and its customers and therefore HMRC is committed to supporting its customers to get their tax right without the need for a dispute.” 

Last year, the Chartered Institute of Taxation (CIOT) expressed concern that technical specialists, HMRC’s Solicitor’s Office, and tax counsel, are often engaged too late in the process, sometimes long after HMRC has made its decision and a dispute has arisen.

Where HMRC officers carried out advocacy on cases, there was less evidence that they undertook an objective assessment of the merits of the case, which supported what many CIOT members were reporting, that HMRC appeared to be taking increasing numbers of cases where the prospects of success appear much lower than 50%.

Of particular concern to the CIOT was a reference in HMRC’s single departmental plan which stated that it will ‘maximise revenues due’ rather than ‘maximise collection of revenues properly due.’

HMRC’s aggressive and uncompromising attitude is worrying and concerning and needs to be reined in. The IR35 Forum, here, could do more to highlight this problem. In the meantime, should any contractor be taken up for IR35 investigation, they should prepare for trench warfare!

Andy Vessey is Head of Tax at Larsen Howie

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