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IR35, “CEST” Tool and of course “MOO” still causing HMRC & Contractors problems.

Welcome to Contractor Corner, the series written specifically by Qdos Contractor for accountants with clients who are contractors

Tribunal case highlights flaws in HMRC’s argument

A Tribunal case concluded 18 months earlier has recently been made public. The case involved Armitage Technical Design Services Ltd (ATDSL), whose company provided highly specialised services in the nuclear industry with over more than 25 years.

ATDSL appealed HMRC’s decision that its contracts with Diamond Light Source Ltd (DLS) from 2009-10 to 2013-14 were caught by IR35. HMRC also applied penalties on the basis that ATDSL hadn’t operated due diligence in checking whether IR35 applied, which ATDSL also appealed.

Although the case was heard on 15 November 2016, the decision has only been revealed recently because the decision was issued by the Tribunal orally, and there was no request made for them to issue a full written response.

The usual key status tests were considered by the Tribunal:

  1. Right of Substitution: ATDSL’s contractual terms included right of substitution clauses and Mr Armitage believed that a genuine right of substitution was evident and could be utilised if necessary, however never carried out in practice. It was considered by the Tribunal that the right did exist, but that it was somewhat limited.
  2. Control: With regard to control over the services, the end client wanted to make sure that the services were carried out in accordance with agreed timescales. However, there was little control over how ATDSL provided the services. The Tribunal were satisfied that, despite evidence of a small degree of control “it was not such that clearly made DLS the master”. A significant point in favour of ATDSL in this case was that its services had been engaged by the client because of the specialist services it could provide, which the client did not possess within its own organisation.
  3. Mutuality of Obligation: On the point of Mutuality of Obligation (MOO), HMRC attempted to put forward their very simplistic view that MOO existed because there was an offer and acceptance of work in return for payment. But in response to HMRC’s contentions the Judge responded: “That would be true of every contract both employment and for services otherwise the contract would not exist at all. The mere offer and acceptance of a piece of work does not amount to mutuality of obligations in the context of employment status.”

The Tribunal were not convinced by HMRC’s rhetoric concerning MOO, indicating that perhaps they are not on the same wavelength as HMRC, which could have certain ramifications concerning the maligned Check Employment Status for Tax (CEST) tool, which controversially omits MOO.

The Tribunal’s decision was that ATDSL’s contracts with DLS were not caught by IR35 and although there were pointers towards both employment and genuine self-employment, it was considered that there were more factors pointing towards a genuine contract for services, rather than of service (employment).

HMRC ignore problems with IR35 public sector reform

Notes recently published from The IR35 Forum, which met on 10 May this year, demonstrate that HMRC consider themselves worthy of a pat on the back, with IR35 reform in the public sector presented as a complete success. It said: “Data shows that compliance has improved as a result of the reform… HMRC estimates an additional £410m of income tax and NICs have been remitted since the public sector reform was introduced.”

HMRC’s supposed success has clearly been shared with the Government and in the House of Commons. In response to a question asked by Peter Dowd, Shadow Chief Secretary to the Treasury, who asked how much revenue has been remitted since the public sector IR35 reform was implemented, Mel Stride, Financial Secretary to the Treasury, gave the same figures cited by HMRC in the forum meeting.

Blanket rulings

Although HMRC did recognise concerns raised by forum members that blanket IR35 decisions were being adopted by many public sector organisations choosing to adopt a cautious approach, HMRC did not see this as problematic and even suggested that, in some cases, it may be acceptable to adopt blanket decisions. It said: “There will be occasions where workers are hired to carry out identical roles, with the same terms and conditions and where the same determination is correct. This is legitimate and does not amount to a blanket ruling.”

This approach contradicts HMRC’s own guidance in their Employment Status Manual (ESM0502) regarding fact-finding techniques, which talks about establishing the facts of each case.

Their guidance does not suggest that adopting blanket approaches to IR35 is the correct course of action – nor has this ever been the case. IR35 requires each engagement to be assessed on a case-by-case basis.


In response to forum members’ concerns expressed over the CEST tool and its neglect of MOO, the minutes state that “CEST has been tested using the core case law that people would expect”, but their view is highly flawed and simplistic. Despite HMRC’s explanation of the absence of MOO in the CEST tool having been published recently, their view doesn’t seem to be one which is shared by the tax tribunals, as recent decisions have shown.

In a Select Committee Hearing held in March this year regarding BBC pay, BBC presenters gave evidence concerning use of the tool. Liz Kershaw, a BBC radio presenter, commented on the CEST tool and demonstrated how it is difficult for the tool to be applied within the media industry, using the example of a question surrounding the provision of plant machinery.

There has been recent talk in the press of HMRC considering alternative arrangements with the BBC to resolve the issues highlighted in the Select Committee hearing. However, this has been denied by Mel Stride, who was asked what special arrangements or exemptions HMRC had entered into to enable public sector bodies to meet their requirements under the public-sector rules, stated that: “HMRC has not agreed any exceptions or special arrangements with public sector bodies.”

For the time being, HMRC seem happy to remain in denial, particularly as they can cling on to their estimation of an extra £410m being remitted by reform (of course this is just an estimation and not indicative of compliance). The consultation on IR35 reform in the private sector closed on the 10 August and it remains to be seen whether any comments will actually be heard.

  • Thanks to Qdos Contractor for these articles

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