IR35 reforms: IT contractor fleshes out details of potential HMRC legal challenge

HM Revenue & Customs (HMRC) could face court action for preventing some limited company contractors from fulfilling their business directorship duties since the roll-out of the IR35 reforms.

That’s according to IT contractor Mike Gibson, who cited this as an example of the type of legal challenge HMRC could face over its implementation of the new-look IR35 rules.

In instances where public sector engagements are wrongly classified as inside IR35, HMRC could be accused of preventing limited company contractors from fulfilling their directorship duties, as set out in their firm’s Articles of Association.

“The Articles of Association describe how I’ll run the business and describe what it will do, and IR35 frustrates me from doing that because it tells me I’m not allowed to be a company director, I’ve got to be an employee,” Gibson told Computer Weekly.

“The question is; are [HMRC] frustrating my ability to be a director of a company that is legally constituted under English law through their implementation of IR35?”

As previously reported by Computer Weekly, Gibson – along with several others – is in the throes of a crowd-funding campaign, geared towards financing an IR35-related legal challenge against HMRC.

The group has already exceeded its initial 30-day fundraising target of £10,500, paving the way for them to enlist the help of a barrister to ascertain what grounds a successful legal challenge against HMRC could and should be based on.

According to Gibson, there are a number of potential directions an IR35-related legal challenge against HMRC could go.

Other challenges could centre on the Employment Status Service tool HMRC advises public sector organisations to use when classifying the engagements of their contractors, which has been previously described as “unfit for purpose”, said Gibson.

“There are a number of potential avenues that could be pursued, and we haven’t shut any of them off,” he said.

Since 6 April 2017, the onus for deciding whether or not contractors should be taxed in the same way as permanent employees (inside IR35) or off-payroll staff (outside IR35) has shifted to the public sector organisations they engage with. 

In an ideal world, contractors would not have to resort to going to court to challenge HMRC over the “iniquity” of IR35, said Gibson, but the tax collection agency has left them with no other option.

“I’d like HMRC to drop the drawbridge and chat this through, so we can come up with something that is fair and equitable for all involved, because it clearly isn’t now,” he added.

“I’d really like not to have to go down the legal route at all – I’d like for us to sit down as sensible human beings and bash it out, but until they behave like grown-ups, we have to keep looking at the legal route.”

In a survey carried out by online recruitment firm CW Jobs, 71% of IT contractors report seeing their income slump as a result of the IR35 reforms coming into force, with around a third (29%) claiming to have seen an 11% to 20% drop in take-home pay.

Furthermore, 47% claim to have born witness to IT contractors exiting the public sector as a result of the new-look IR35 regime coming into play on 6 April, with 83% describing the private sector as a far more attractive place to work.

The survey results, published in mid-July 2017, also suggest contractor confidence in the ability of the public sector to deliver on digital projects has been negatively affected by the IR35 reforms.

For example, just under half of all respondents (47%) said they feared the public sector now lacks the digital skills needed to deliver on future projects.

This is a view shared by Gibson, who claims the IR35 reforms are out of step with the way our increasingly “gig-like” economy works.

“It is making our economy far less flexible and is punishing people who want the flexibility to move around the economy a lot more easily,” he said.

“It doesn’t suit everybody because some people like the security of having a permanent role, but that’s not the way the world is going and IR35 flies in the face of an ever-more progressive and flexible economy because it has the opposite effect.”

Computer Weekly put these points to HMRC, which responded with the following statement: “Public sector organisations and contractors are free to work with each other in a manner that suits their circumstances, however it’s fair that two people doing the same job should pay the same taxes. These reforms help ensure that happens.”