Back to the Drawing Board?
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
12 April 2018
Justine Riccomini examines HMRC's recent IR35 loss.
Much has been made of the recent HMRC victory in February 2018 over former Look North TV presenter Christa Ackroyd who was presented with a tax bill of around £420,000 covering the years 2006/7 to 2012/13. Heralded by everyone except HMRC as the first victory for nine years, less than a month later, HMRC received the news in mid-March 2018 that it had lost its case against Mark Daniels at the First-Tier Tribunal (who worked through a personal service company MDCM Ltd), this time over a contract of two tax years’ duration (2012-13 to 2013-14).
Background
MDCM Ltd was engaged under a contract to provide services to Structure Tone Limited via an agency, Solutions Recruitment Limited. When HMRC reviewed the arrangements, it concluded that but for the existence of the intermediary company MDCM Ltd, Mr Daniels would have been an employee of Structure Tone. HMRC also emphasised high levels of supervision, direction and control as well as the lack of financial risk when making its case.
A strong enough counter-argument?
MDCM Ltd argued that not only was there no control, but the lack of severance pay, notice period, holiday pay or travel and subsistence in the carrying out of the work was indicative that a contract of employment was not in place.
However, the case found that Mr Daniels was deemed to represent Structure Tone to outside contractors, was working under the title of Night Shift Manager, completed a time sheet, wore Structure Tone branded protective workwear and took instructions as to what work was required from the site manager.
The Rationale
The Judge commented, despite ruling in favour of MDCM, that even though the terms of business included a substitution clause, substitution could not have happened in reality. Thus, substitution was not in point, which of course means Mr Daniels could only have been providing a personal service with mutuality of obligation.
Having taken each of the factors to determine employment status (such as lack of financial risk, provision of equipment, personal service, employment rights, substitution etc) into account and placing them into a “hypothetical” contract, the Judge considered that the criteria pointing to employment were outweighed by the criteria pointing towards self-employment.
In summing up, the Tribunal did not accept HMRC’s arguments about control but did agree that the requirement for personal services and lack of financial risk pointed to an employment relationship. However, it found that the nature of the payment arrangements, a flat rate per day with no notice period and no entitlement to any employee benefits were inconsistent with employment. Further, Mr Daniels was not treated as an employee.
More holes than Emmenthal?
The weighting of substitution as set out in the main case upon which HMRC relies came to the fore again recently after being given something of a back seat in the last decade.
Does this mean back to the drawing board in terms of trying to determine how IR35 should work? With such disparity of treatment between IR35 and employment status cases generally, the question of employment status is highly unpredictable.
Consultation
HMRC is currently consulting on how the whole approach to employment status should be resolved.
ICAS will be responding to this consultation – if you have any comments or feedback you wish to have included, please send them to tax@icas.com.
Conclusion
The whole area of employment status is complicated - and made more so when the tribunals come to conclusions which vary so widely. Confusion reigns and employers are left at a loss as to what the right path is. Arguably, the case for the introduction of legislative definitions of employed, worker and self-employed categories has never been stronger.