IR35 tribunal sees Nationwide IT contractor lose second appeal against £70,000 HMRC tax bill

An IT contractor who received an IR35-related £70,000 tax bill by HM Revenue & Customs (HMRC) has had his appeal pertaining to the case dismissed by a tribunal judge for a second time.

Project manager Robert Lee received a £70,000 tax demand in relation to a series of IT-related outside IR35 contracts he completed for Nationwide Building Society between 2012 and 2015, delivered through his limited company Northern Lights Solutions.

However, HMRC claims the way Lee worked with Nationwide meant his engagements should have been classified as inside IR35, making him liable to pay the same National Insurance Contributions (NICs) and Pay-As-You-Earn (PAYE) tax as a permanent employee would.

Lee initially attempted to challenge HMRC on the matter through a First-Tier Tribunal in February 2020, but his appeal was dismissed. He was then granted permission in July 2020 to lodge another appeal, which paved the way for a two-day Upper Tribunal hearing in May 2021.

The outcome of that hearing has now been made public, with the Upper Tribunal judge confirming this second attempt at an appeal by Lee has also now been dismissed on various grounds, including the high levels of control that Nationwide had over how Lee worked during his engagement.

Another reason why the appeal was dismissed is because the tribunal disputed the claim that Lee had a genuine right of substitution, which is considered a key determinant of whether a contract is outside IR35 or not.

In an outside IR35 context, contractors should be able to demonstrate that their end-client is not solely reliant on them to deliver the services they are being contracted to provide and that a substitute with the same skills, and experience could be appointed and step in if needed.

Evidence shared in the tribunal notes suggests it would not be viable for Lee to “send someone else to do the work” because they would not “get through security, they would not have a laptop nor knowledge of the work. The reality was that it was not going to happen.”

Dave Chaplin, CEO of contracting authority ContractorCalculator, has described the outcome of the ruling as “somewhat unfair”, and said the outcome appears to be down to a lack of understanding by the tribunal judges about the reality of working on an IT project.

“Lee’s contract did include a legitimate unfettered right of substitution, but it was never exercised, and the client never gave witness evidence to back it up as a genuine right,” said Chaplin.

“The judges chose to disregard those substitution clauses. Substitution is no silver bullet to definitively proving a worker is not employed unless it has taken place.

“While I have some misgivings about some of the conclusions drawn, the law appears to be correctly applied,” he said.

“However, many businesses are one-man bands and deliver their services personally. But that alone does not mean they are all employees.”