IR35: 2017 to 2019 - a case summary

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By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)

4 February 2020

Justine Riccomini takes us through the key IR35 tax cases since the introduction of the new rules in the public sector were introduced in April 2017.

Introduction:

Using April 2017 as a starting point, since the public sector rules for IR35 were brought in, there have been a number of cases heard in the Tribunals. The decisions do not give tax advisers much reassurance, raising more questions about HMRC’s approach to employment status than offering reassuring answers, and there are few precedents to rely upon.

Background

A relatively long list of cases has been through the Tribunals since April 2017 as a consequence of HMRC’s increased compliance activity. However, many of the cases are fact based and it is not easy to predict what will happen, although HMRC is not having an easy time of it, which suggests that the underlying guidance and CEST Tool are not particularly stable.

IR35 Case decisions since 2017

Please note that a more detailed analysis of the key points in the above cases will be available in the extended article which is available to subscribers of the ICAS Technical Bulletin.

Tax case law is how employment status for tax purposes is ultimately determined. Therefore, anyone deciding or advising on employment status, and from April 2020, producing Status Determination Statements (SDS), should familiarise themselves with applicable case law and the key issues which the judges used in each case to determine their decisions.

Mutuality of Obligation (MoO)

One of the key issues arising from the case law is that upon reading the case transcripts, MoO is still providing a problem insofar as HMRC’s interpretation of how it should be applied (for example, it is not included in the HMRC CEST Tool). In Mantides the principles around MoO were closely examined and were vital to the conclusions reached; in this case, of the two contracts, one amounted to an employment and the other to a self-employment. MoO certainly appears to have made a comeback in the courts over recent years. This contrasts with HMRC’s position - it appears to have relegated MoO to the back benches as a minor consideration. Engagers preparing SDSs should ensure that all the main decision criteria are included in the SDS process – including MoO.

A purposive view

Recent case law has shown that the judges are increasingly favouring adopting a purposive and holistic view of the arrangements rather than concentrating on one or two aspects of the key principles of employment status and using these as deciding factors. For example, in Ackroyd, which has been heard by both the FTT and the UT and in Paya which was heard at the FTT, the judges chose this method. In another employment status case (which was not related to IR35) from 2018, Pimlico Plumbers Ltd and another v Smith [2018] UKSC 29 a purposive approach was taken to the analysis of the contractual arrangements. Notwithstanding this, a main consideration in recent IR35 related tax cases still appears to be the level of control exercised by the engager over the worker – which, perhaps correctly, has been shown to be more weighty than other factors such as substitution and personal service.

It is important to note when considering tribunal applications that HMRC’s own litigation and settlement strategy requires HMRC to consider whether it has a decent chance of winning a case before proceeding. This is something which can legitimately be pointed out to HMRC during any dispute resolution process.

A note on precedents

It is clear from the above, which comprise mostly of First Tier Tax Tribunal decisions, that very few precedents have been set – FTT decisions are not binding. Further hearings are currently expected on Kickabout in mid-June 2020 under reference UT/2019/0112 and in Atholl House in early November 2020 under reference UT/ 2019 /0086.

Conclusion

Care needs to be taken when making employment status decisions and especially so from April 2020 when all public sector as well as large and medium-sized private sector and non-profit-making businesses will be responsible for issuing Status Determination Statements (SDS). Employment status is notoriously complicated and the new IR35 rules do not make things any less so.