IT Contractor loses IR35 appeal to HMRC
An IT contractor has lost their Upper-Tier Tribunal to HMRC. In the recent case, contractor Robert Lee, who was contracting for Nationwide Building Society under his limited company, Northern Light Solutions Limited, had appealed the decision that was reached in the First-Tier Tribunal, where Lee lost the case.
Ultimately, the decision in the recent Upper-Tier Tribunal ended with the same result, with Lee once again losing the tribunal. It has been reported by Contractor UK that Lee owes £70,000 to HMRC. Read on to find out why he lost on both occasions and how his IR35 status was assessed.
Northern Light vs HMRC: what’s the history?
When the First-Tier Tribunal decision was reached in 2019, these were the key facts raised at the time:
- Lee was subject to considerable control by Nationwide, consistent with being a highly skilled employee. Nationwide also had the right to direct where he worked.
- There was Mutuality of Obligation (MOO) within the contract.
- Lee started working for Nationwide in 2007. Other than a few short breaks, he worked continually for Nationwide for many years.
- Lee had responsibility for the allocation of tasks to the project team, a mixture of employees and sub-contractors, and for determining the cost and timescales for delivering the project.
- Lee was integrated into the Nationwide team.
- All his work was subject to the governance standards of the Nationwide Framework. This directed how the project was to be managed, and the weekly reports.
- Lee was required to work 7 ½ hours a day and meet weekly hours targets.
- Each of Lee’s contracts was for a fixed term.
- There was an unexercised right of substitution, but this required Nationwide’s consent. In reality, it was difficult to send a substitute due to the high level of specialist experience required. In any event, Nationwide’s approval would be required before he ever used a substitute.
- Lee took very little financial risk and he had few expenses. His financial exposure was similar to that of a full-time employee on a fixed-term contract.
Mutuality of Obligation underutilised
In both the First-Tier Tribunal in 2019 and the recent Upper-Tier Tribunal, there was a low threshold approach to Mutuality of Obligation (MOO). On the one hand, Robert Lee was Nationwide’s preferred contractor and ‘go to’ man and it is not unreasonable to suppose that over a relationship of 7 years standing, that some expectation of work offer and acceptance may have developed over time, rather in the same manner as the Christa Ackroyd case.
On the other hand, each year Lee had a period of furlough imposed on him for 2 – 3 weeks during mid-December to early January. As such, he received no fee. No such furlough period applied to Nationwide employees. Nevertheless, the First-Tier Tribunal viewed this as a temporary suspension of the work-pay obligation, and it did not affect MOO. This contradicts the 2011 First-Tier Tribunal decision in Marlen Ltd, when in situations when the end client (JCB’s) computers failed, contractors were sent home without pay whereas employees remained in situ.
This was seen to be inconsistent with a relationship in which MOO is present. This disparity shows that the courts are not taking a uniform approach to MOO when this test is key to employment status.
Right to Substitution in Northern Lights case
Whilst Lee had a contractual right of substitution, unfortunately for him, it was highly bound to make this test ineffective. HMRC referred to notes of meetings in October 2014 and 2016, in which Nationwide confirmed that Lee could not send someone else to do the work and that the reality was that substitution was not going to happen. This demonstrates that where there is doubt as to the authenticity of a right of substitution, contractors should confirm the position with the end client and, if necessary, invoke that right even if it’s for a nominal period.
The level of control
Whilst Lee could not be moved from task to task at the whim of Nationwide, both the First-tier Tribunal and the Upper-tier Tribunal concluded that Nationwide had a sufficient framework of control to ensure that it controlled Lee. Lee was expected to adhere to the Nationwide Change Framework (NCF), which was a set of governance standards that applied to all projects directing how the project was to be managed, setting required levels of visibility and accountability.
During the First-Tier Tribunal hearing, there was disagreement as to whether the NCF was specific to Nationwide or was an industry standard for project management in financial services. The judge said that nothing turned on that point, but found that NCF was specific to Nationwide, but that similar project management standards would have applied in other organisations. If industry standards had been in force, then it is concerning that a Tribunal would view these as an instrument of control.
In the 2009 Special Commissioners case involving Sherburn Aero Club, the fact that flying instructors had to observe a syllabus for instruction did not amount to control, as this was decreed by the Civil Aviation Authority, so the club had no power in deciding what lessons should comprise.
How can contractors check IR35 status?
HMRC certainly had the upper hand in this case, as they were able to refer to things that Nationwide representatives had said unhindered, as no witnesses from Nationwide were willing to give evidence, so there could be no cross-examination.
When contractors are checking their IR35 status, they should consider an IR35 tool for a comprehensive view of the strengths and weaknesses of their engagement. One option they could look at is Kingsbridge’s award-winning status tool. The hybrid approach offers the best of both; a fully automated tool, with manual intervention by our in-house IR35 team for any indeterminate results. Once your status has been assessed, you will get a full report of your engagement. Buy an assessment here for just £50 plus VAT.