Brit IT contractor wins appeal against HMRC to pay £26k in back taxes

Hopefully they can make fairer rules and less of a crap-shoot

There are some key facts about contractors:

a) A contractor does not receive any employment protections, unlike an employee

b) A contract does not receive sick pay (even statutory amounts), unlike an employee

c) A contract has to file annual tax returns, unlike an employee

d) If earnings are above a threshold they have to be VAT registered, unlike an employee

e) A contractor does not generally expect an annual bonus, unlike an employee

f) A contractor is less likely to expect to be considered for promotion

g) If there are some economic headwinds, a contractor is more likely to accept a pay cut

h) When there are cuts, a contractor expects to be in the firing line and gets on with doing their job while the employees try to ensure alternatives are considered, etc

i) When a role is cut, a contractor expects to work until their last day where an employee may expect to be paid in lieu as well as redundancy

j) A contractor does not receive paid holiday time

k) A contractor generally pays for their own training

I could go on. However, the point is that HMRC should recognise that the contracts themselves are worded in a way to ensure the contractor does not receive the various statutory protections of employment. Businesses benefit from the flexibility of having access to skills that they can retain or release at will. Employees benefit from having a layer of more disposable workers as employees would have first claim on any alternative roles within the company and the company would be expected to cut contract workers first as they're not employees. Contractors benefit from favourable taxation in return for this. Since dividend taxes were introduced in recent years there's a much reduced benefit to being a contractor over being an employee, so it's about time HMRC accepted the remaining different as the perk of accepting the complete lack of job security and has expenses that an employee doesn't. It's a situation that has worked for many years for workers and businesses.

Since the business has benefited from the flexibility of the arrangement while the contractor has not received any of the statutory perks of employment like holiday pay, surely it's reasonable HMRC should be targeting the business not the contractor about any additional tax payments anyway?

Beware what you wish for

HMRC ? Simplification ?

ROFL. and more ROFL.

Seriously, in this country, HMRC exists to make life hard for one and all. They hope that my you (or your accountant) not fully understanding what Part 3, Section 10, Subsection 23, Paragaph 6a of the Tax Law passed in 1910 means.

Then they can come after you with all guns blazing.

Rather sad really when there are mega corps pissing all over them and paying a mere pittance in Tax.

So one part of government takes to court someone who works on an IT project for another part of government and people wonder why it constantly fails with IT projects.

Hearing this has made me warm and fuzzy

grist to the mill

IR35 was brought in to address the less sensible who listened to the accuntants in trying to scheme something that was not going to last very long. The legacy is now silliness that hurts us all.

As a sole trader former employers are interpreting their tax office liability reduction to insisting that I use a service company or they cannot use me. I have already made clear the legal problems having talked to the taxman, If they want investigating that is a flag, In the meantime I `m stuck with much less work due to some venal fool`s history now screwing us all.

One of my oldest friends who was a developer implementer had tne taxman going punitive and then given a clean bill of health in the early days of this . He said don`t start a company, don`t get vat registered unless you have to, because they will ask why you have no or low turnover and you are assumed guilty. Only perfect record keeping will save you It took 3 years in employment and company confirmed shut down proven for the vatman to not keep tickling.

Selfish bastards screw us all.

I do want to find them and get east endian. They will just run away as far they can and do from being decent too.

Sorry

Bah!

All this fuss for a paltry 185 Megaquids per year.

More pathetic given that the govt is swimming in cash thanks to the 350 megaquids per week Brexit earned.

So, HMRC, how's that windfall coming along?

@HMRC - still struggling to find people to work on your IT projects, or have you bitten the bullet and increased your costs by paying the contractors more so they can cover the additional risks you dumped on them?

Not exactly stellar thinking, and it's not as if they weren't warned. Roll this out to the private sector without some cast-iron directions and it won't be contractors taking you to court. Businesses take a very dim view of loading costs on to them (such as finding people at short notice to fix all the stuff that permies struggle with because they have to adhere to office politics).

Here's a suggestion for a possible test of in/out of IR35 - if the contractor can talk to a senior manager in the business and tell them straight (no need to be rude) that their ideas/decisions are the root cause of some major issue and that contractor is still wanted to work on the project the next day, they aren't an employee.

One of the main reasons I went contracting was to get away from office politics. You don't escape entirely as you can often be used as the lightning rod and expendable flare for managers, but it's nothing personal and they pay you a shit-load for the risk.

Doesn't bother me, because I work hard to have a cast-iron reputation, so loss of contract due to 'unforeseen circumstances' is usually interpreted correctly as having taken a fall for some dick-head in a major corp who can't be sacked (maybe they get moved on somewhere where they can do less harm) - but someone has to take the fall - it happens (not very often fortunately, because as a *real* independent consultant I get to tell the clients' senior staff what they're doing wrong before it comes to a heads-rolling scenario).

You'd be amazed at how few senior company managers hear the *actual* truth from someone at the coal-face that can't just be dismissed as whinging. Some of them actually value it (just keep it civil and constructive).

With regards to this judgement - if it had gone the other way, does the client get back all the VAT that the 'employee' charged them during their tenure? Permie's don't charge their employers VAT after all. I can see companies suing HMRC to recover all that VAT they paid out, they can't have it every which way and not expect some kind of push-back.

I’d be interested to know if he received an APN over this business. You know, the thing where HMRC can demand the money they think you owe them while you wait to go to court.

Also, no doubt the govt will now change the law to close this “loophole” and make sure more contractors are forced to pay out because HMRC says so.

Lastly, I wonder if the amount demanded accounted for the corporate tax already paid?

Cake time.

How is it HMRC can have its cake and eat it? If it won the case above - would HMRC have handed back all the VAT it collected under false pretences? The reality is contractors working under a personal services company raise more tax than they would have done as a permie doing the same job, so BOTH parties win - what's the problem? How much tax will the average £40K per year permie pay, in the same job as a contractor, the VAT raised alone will be more than permie pays in income tax, then on top of that there will be corporation tax, dividend tax as well the usual (admittedly limited) income tax and NI.

No VAT is raised, the contractor charges it and the client reclaims it. Only when the client can not reclaim VAT due to non registration is VAT raised.

I'm hoping someone will indeed reclaim the VAT back though as presumably the invoice is null and void in these cases.

Then refund that VAT to the client nett of the NI/PAYE paid plus pay for sick/holidays due.

I thought it was up to the employer to ensure compliance so why is the HMRC not therefore going after the employer rather than the employee. As an employee you are not licable to pay NI and PAYE as the employer deducts it at source.

I really don't understand how they are getting away with this one.

"Seb Maley, Qdos Contractor CEO, said: "Despite HMRC implementing and enforcing the rules, this verdict shows they can't accurately assess a contractor's IR35 status.

"The government is serious about clamping down on what they believe to be non-compliance, but worryingly can't recognise whether a contractor belongs inside or outside IR35. That the individual was working on a government project simply adds to the irony."

To be fair, this ruling only shows that either HMRC or this particular judge can't accurately assess a contractor's IR35 status. If this were any other walk of life, we would assume that it was the judge that was wrong about the assessment. What we are really saying is "HMRC wrote the guidelines, but the judge knows better than HMRC what they say." I'm not convinced by this argument, to be honest. I'm not saying that HMRC is right, I'm saying that a single person saying that they are not, judge or no, doesn't prove they are wrong.

The driver for using Contractors

Most Government departments have restrictions on their expenditure for employees/workforce. This is managed by accountants who draw this from OPEX (Operating Expenditure).

Thus to employ people without affecting OPEX you must use CAPEX (Capital Expenditure). This is usually defined as project cost.

Thus using CAPEX instead of OPEX you separate Contractor from Employee. Therefore, Contractors are not employees. No IR35.

The article omits an important detail of the case: this is the second time the guy has been targeted by HMRC, and ALSO the second time he beat them. That stinks of a punitive agenda which is against the principles of impartiality HMRC are supposed to be have. Even worse, the cost of prosecuting the case would have been higher than the paltry sum of tax they could have claimed if they'd won and so this would have been a symbolic victory. As it stands, us taxpayers have to foot the bill for the lawyers.

"Thus to employ people without affecting OPEX you must use CAPEX (Capital Expenditure). This is usually defined as project cost.

Thus using CAPEX instead of OPEX you separate Contractor from Employee. Therefore, Contractors are not employees. No IR35."

CAPEX is the purchase of assets that must amortised over their lifetime as they deliver value beyond the financial year in which they were purchased. For tax purposes they cannot be claimed as business expenses. OPEX is everything that's more or less an ephemeral operating cost (and therefore a 100% deduction from revenue) for tax calculations.

The costs of retaining employees and the services of contractors to keep your business operational both fall under the latter. Which internal 'budget' a client uses to fund this is wholly irrelevant as far as HMRC's view of the client's, and contractor's tax situations is concerned.

IR35's Silver Bullet is...

There is 1 silver bullet that kills the IR35 "disguised employee" argument, and that is the Substitution Clause. Here's how to do it in practice:

Just to be clear, being able to substitute yourself in a role is a cast iron "I am not an employee" card, because no employee can choose to send someone else in their stead; case law: Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (1968).

However the substitution clause itself isn't enough, it can't be a "sham" clause; case law: Autoclenz v Belcher (2011)

Here's how you prove your substitution clause isn't a sham, when working for a company that requires ID, and logins and passes etc to turn up on-site and work; it all revolves around "working from your home office":

1) First decide to work from home office one day. Of course a courteous contractor would inform the client's Project Manager (PM) about this beforehand, and accommodate any reasonable client requests about when this would be most convenient, but in 15 years as a contractor, I never had a contract where this wasn't possible to arrange, even if for just one day.

2) Agree with the client's PM that you'll be working on documentation whilst working off-site. Ensure that said documentation isn't anything excessively sensitive to the client's IP or security.

3) Agree with the client's PM that in order to get the most effective work done by the most able people, and to help meet the next deadline, you'll get in additional documentation support, in the form of a mate or spouse say (your substitute), doing some graphs, tables, spell checking, formatting etc, of said documentation. All at no extra cost to the client. Allowing you to focus on the core technical work. (It's possible to skip the agreeing with the PM bit if you don't get on with them, they're unlikely to notice.)

4) Ensure that the documentation version history accurately reflects that the document was changed by said substitute, including their name and company (you do make sure you put your own name and company on all document version histories, right?).

5) When billing for this month, submit your invoice as normal, but add an extra line showing the work down by your substitute. Ensure as you've agreed with the PM in (3) that there's no extra cost for this, so you'll likely have an invoice that instead of saying "20x days for me", it says: "19x days for me, 1x day for subbie". The total is the same. Submit this in the usual way.

6) You may need to explain to the client's finance team that the odd extra line was cleared by the client's PM already. Most likely, they won't even notice. If they're an agency that operates "self billing" then they likely won't even look at your invoices anyway, but as a real business, you should always create your own invoices and file them accordingly. Arguably this is even better as there's no one to query what you put on your invoices.

Now you have a cast iron paper trail of actual substitution, with your subbie doing real work, documented in the version history, and their time being invoiced independently. Your arrangement is now incontrovertibly incompatible with one of being an employee. And yes, I have done this, several times. Copies of the invoice and documentation are kept in my "IR35 defence file", you have got one, right?

Tada: one IR35 silver bullet! :D

And another thing ...

After years of fighting it I finally succumbed and paid £41k in taxes and NI and completed their stupid forms last year. I hated doing it. Being told that it was my choice BUT if I didn't do it I would be heavily fined always annoyed me. The whole idea of retrospective taxing has always annoyed me. But I did it and drew a sigh of relief that it was finally over. Then early this year I received a letter stating that because I hadn't met all of their demands I had to pay a penalty, apparently I hadn't completed the forms correctly, I had written "I don't want to do this, I am doing it because I have to", they didn't like that, however when I'd previously called HMRC and asked for advice on how to complete the forms they stated "we cannot advise you how"! I complained and two months later received a letter stating that my forms were ok but the issue was I hadn't withdrawn the appeal ... I didn't withdraw the appeal because they'd already rejected it, so I thought it was irrelevant. I finally received a penalty for £12,767, a third of which was for meeting their demands after the deadline, which I only did because their initial letter didn't mention the appeal! I appealed against the penalty but they rejected that. I have re-appealed and am awaiting the outcome but am not hopeful.

Yesterday I received a letter which stated that the National Insurance I'd paid for 2003 and 2005 was no longer due so I had been issued a credit, great, but attached was a Self-Assessment statement showing that I'd been charged interest of nearly £12k on the tax for 2003 and 2005 (until I purchased a tax credit in 2009 ... which I did as soon as I was told by HMRC that interest would be due on the tax) so I in fact owe them another £8k+.

The whole idea of retrospective taxation is outrageous and I still can't believe they've got away with it.

This whole saga will have cost me £62k (which is more than 50% more than the tax I initially saved) for using a system which was legal in 2003 and 2005 but subsequently deemed not to be. I had the foresight to purchase a tax credit to cover the taxes and save money rather than enjoying it, but how many people are going to be bankrupted by these incessant demands from HMRC? The tax won't be the end of it, there's the interest and penalties which could (more than) double the taxes which (HMRC have decided) are due.

I would like to add that (contrary to HMRC's assertions) I was not an employee. Employees receive paid holidays, paid sick days, end-of-year (and other) bonuses, training, career progression, pension, etc, the list goes on an on. I received none of these. So how exactly was I an employee?