IR35 tribunal rules HMRC wrong to pursue ex-DWP IT contractor for £240,000 in unpaid employment tax

HM Revenue & Customs (HMRC) was wrong to pursue a former Department for Work and Pensions (DWP) IT contractor for unpaid employment taxes totalling more than £240,000, an IR35 tribunal has ruled.

The tax collection agency claimed IT contractor Richard Alcock was liable to pay National Insurance Contributions (NICs) and income tax contributions totalling £243,324, accrued during engagements he embarked on with Accenture and DWP during the 6 April 2010 to 6 April 2015 tax years.

HMRC determined these engagements should be classified as inside IR35 and Alcock taxed in the same way as a permanent employee, which he contested on the basis he worked as a self-employed person, fulfilling a contract for services during these engagements. As such, his engagement should be classified as outside IR35.

The tribunal judge, in a published ruling dated 29 October, upheld Alcock’s appeal and confirmed he does not have to pay the employment taxes HMRC claims he owed because his engagements classify him as an off-payroll employee.

The tribunal document cited the low-level of mutuality of obligation (MOO) that exists within Alcock’s engagements as a reason for its verdict. As such, he was under no obligation to provide work to either organisation, and nor were they liable to pay him if there was no work for him to do.

The matter of MOO is frequently cited within IR35 tribunals as an essential test of whether or not an individual should be considered to be working as a permanent employee or an off-payroll worker.

Other factors taken into consideration in Alcock’s case was the fact he was never expected to attend meetings pertaining to matters outside of the IT projects he was contracted to work on, nor was he entitled to sick leave, paid holiday or expected to take part in internal training, for example.

In a statement, Alcock outlined the personal toll that HMRC’s pursuit has taken on him since its demands for payment began.

“The pressure on me and my family has been immense. I cannot understand why HMRC pursues contractors so much. Their bullying tactics have been extremely stressful, made all the more difficult to bear since the verdict has ruled in my favour. I should never have had to go through this in the first instance,” he added.

In a brief statement to Computer Weekly, HMRC said it is disappointed in the outcome of the tribunal and that it does intend to appeal against the ruling.

Dave Chaplin, CEO of IR35 consultancy ContractorCalculator, assisted Alcock with his appeal, and is of the view that HMRC should have spotted “from the outset” that his engagements did not fall in scope of the IR35 regulations.

Furthermore, the fact MOO played such a major part in the success of Alcock’s appeal should ensure further questions are raised about the suitability of HMRC’s own Check Employment Status for Tax (CEST) IR35 contractor assessment tool, added Chaplin, because it is not factored into the answers it provides.

The tool is billed by HMRC as a means of helping public sector organisations determine whether the contractors they use should have their engagements classified as inside or outside IR35 based on the information they input in response to the 16 or so questions CEST asks.

“The fact the case was won primarily on mutuality of obligation… should surely now be the final nail in the coffin for CEST, HMRCs online assessment tool – because this essential employment status test is still missing from the tool,” said Chaplin.

This is the second time in a week the tool’s suitability has been called into question, after details recently emerged that NHS Digital is facing a £4.3m IR35-related tax bill for misclassifying its contractors, despite using CEST.

“HMRC’s tool is demonstrably not fit for purpose, omits essential areas of law, and is risky for businesses to base decisions on. It should be withdrawn with immediate effect,” added Chaplin.

Computer Weekly put these claims to HMRC, which declined to respond.

Chris Leslie of Tax Networks, who represented Alcock during the case, said HMRC was given several opportunities to wind up the case but chose not to.

“HMRC’s case was disproportionate, largely dependent on asserted facts involving weak and uncorroborated information,” added Leslie.