Ir35 Case Law: What's The Verdict?

IR35 is based on historic case law, and previous IR35 cases have set the standard for how IR35 is dealt with today. The aim of IR35 is to prevent contractors from avoiding tax and National Insurance by treating them as employees for tax purposes. There is no definition of self-employment or trade in the statute, so case law is used to determine employment/self-employment status. One of the most important pieces of case law is Ready Mixed Concrete (RMC), which is still used to defend IR35 cases today. Other notable cases include Dragonfly Consulting Limited (2008), in which the director and owner of Dragonfly was deemed a 'disguised employee' and faced a £99,000 bill for unpaid tax, and Jensal Software Ltd, in which Qdos was able to stop HMRC from making an example of a public sector contractor.

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IR35 case law and employment status

IR35, also known as the Intermediaries Legislation, is a set of rules that determine whether a contractor should be classified as a "deemed employee" for tax purposes. IR35 aims to prevent contractors from being treated as employees solely for tax purposes, thereby avoiding tax and National Insurance contributions.

The IR35 legislation was enacted in 2000, but the cases that have helped define it go back almost 60 years. One of the earliest cases that continue to influence IR35 judgements is Ready Mixed Concrete (RMC). This case demonstrates how the upper-level contract can impact a contractor's IR35 status.

Another important case is Market Investigations Ltd vs Minister of Social Security (1969), which took a different approach by focusing more on in-business factors. This approach has gained prominence in some IR35 judgements in the 2020s. Since the enactment of IR35, there have been numerous cases that have helped define and shape the application of the legislation.

For example, in Lime IT v Justin (2003), the taxpayer company contracted via an agency to provide IT services to an end-user. The contract contained a substitution clause, allowing the company to send an alternative worker. This case was significant because it highlighted the emergence of the substitution clause as a key consideration in establishing whether IR35 should apply.

In recent years, there have been several notable cases involving TV and radio presenters, including Kaye Adams, Lorraine Kelly, Christa Ackroyd, and Adrian Chiles, who successfully argued that they were in business on their own account and were not employees. Other cases include that of Mr Wells, an IT contractor who avoided a £26,000 HMRC claim by proving he was working under a contract for services, and Phil Thompson, a former Liverpool footballer and Sky Sports pundit, who lost his IR35 appeal and was left with a £300,000 tax bill.

These cases highlight the complexities of IR35 legislation and the importance of understanding the factors that influence employment status. While each case is decided on its own merits, the three key factors that determine employment status are control, personal service/right of substitution, and mutuality of obligations (MOO).

IR35 and self-employment

IR35 is shorthand for tax legislation intended to prevent 'disguised employment'. This is where a person works like an employee but is paid via an intermediary (usually a limited company) instead of through Pay As You Earn (PAYE) like a normal employee. IR35 rules apply specifically to workers who are effectively working as employees but have registered as a limited company to provide a service. This means they can pay less tax.

IR35 does not apply to sole traders because they operate as self-employed individuals rather than through a limited company. Sole traders are responsible for paying their own income tax and National Insurance Contributions (NICs). They must complete a self-assessment tax return each year to report their business income and expenses. Even if a sole trader was found to be inside IR35 for a particular contract, they would still be considered self-employed for all other purposes.

If you are 'outside IR35', it means that you are not considered an employee of the client using your services. HMRC sees you as genuinely self-employed, and you will be responsible for paying the right amount of tax by completing a self-assessment tax return each year. Being 'outside IR35' means that the rules do not apply to your engagement, meaning that it is one of genuine self-employment for tax purposes.

To help make determinations, the government hosts a free-to-use tool named 'Check Employment Status for Tax' (CEST). This asks a series of questions and generates a status decision based on the answers provided. While CEST primarily exists for clients, it can be used by anyone, including contractors. It's entirely anonymous and HMRC keeps no record of it.

If HMRC later determines that an engagement was actually one of disguised employment, the IR35 rules give them the power to issue demands for Income Tax and National Insurance to be paid on the fees received by the employee during the engagement.

IR35 and tax/National Insurance

IR35 is a set of rules that ensure a worker (or contractor) pays the same Income Tax and National Insurance as an employee would. IR35 tests for employment are different for income tax and National Insurance and may yield different results for the same purpose. There is no definition of self-employment or trade in statute law, so case law is used to determine employment/self-employment status.

If a worker is deemed to be employed for tax purposes, the employer must deduct Income Tax and employee National Insurance contributions from the fees paid to the worker's intermediary. The employer must also pay National Insurance contributions and the Apprenticeship Levy to HMRC.

The existence of a substitution clause is a key consideration in establishing whether IR35 should apply. This was demonstrated in the case of Ansell Computer Services Ltd v Richardson Sp C, [2004] SSCD 472 (Sp C 425).

Other cases include that of Mr Wells, an IT Contractor, who avoided a £26,000 HMRC claim for unpaid income tax and national insurance contributions by proving he was working under a contract for services and not an employment contract. Celebrity Kaye Adams, a presenter, won her IR35 challenge when a First Tier Tribunal (FTT) found that the terms of her contract meant she was not an employee, saving her from having to pay £125,000 in PAYE and NI.

Former Liverpool footballer, Phil Thompson, lost his IR35 case appeal, leaving him with a tax bill for operating as a 'disguised employee' of £300,000.

IR35 and substitution clauses

IR35 is a set of tax rules that apply when a worker provides services to a client through an intermediary, such as a limited company. One of the key factors in determining whether a worker is self-employed or employed under IR35 is the right of substitution. This refers to the ability of a contractor to send someone else in their place to complete a role.

The right of substitution is a vital factor in determining IR35 status. According to case law, there must be an unfettered right to substitute another person to do the work, and this right must be contractually enforceable. The contractor must have the choice of whether to use a substitute and should pay for the substitute and the handover period. The client must not have the right to refuse a substitute without reason, but they can refuse if the substitute does not meet reasonable criteria such as suitability, skills, qualifications, or security clearance.

However, simply having a substitution clause in a contract may not be enough to prove self-employment. The current case law is based on the Pimlico Plumbers Court of Appeal ruling, which suggests that the right of substitution is not as determinative as some might think. In some cases, substitution clauses have been treated as window dressing or a sham, especially when the worker is sourced through an agency.

To ensure a strong substitution clause, contractors should look out for the clause in their contract and ensure they have the unfettered right to substitute. They should also obtain confirmation from the client that this right exists in reality and that they understand the contractor can send someone else to fulfil the contract. Evidence supporting the right to supply a substitute, such as agreement in the written contract, can be useful in defending their status if HMRC conducts an IR35 enquiry.

IR35 and working from home

The off-payroll working rules, also known as IR35, ensure that a worker pays the same Income Tax and National Insurance as an employee. IR35 applies if a worker provides their services through their own intermediary (usually a limited company) and would have been an employee if they provided their services directly to the client.

Where you carry out your work has a bearing on your IR35 status, but it is highly unlikely to be decisive in an IR35 case. In typical circumstances, having the freedom to work from home or wherever you choose can demonstrate that you do not fall under the direct 'Control' of your client and could belong outside IR35. However, if you are instructed to work remotely due to COVID-19, this won't be enough to shift your contract from inside to outside the legislation.

For remote working to be a strong indicator of an Outside IR35 Status Determination, the contractor should be free to determine where to work from and make demonstrable use of this practice. In most cases, contractors still fall under the control of the end hirer, who can direct them to work from their site or office.

To be considered outside IR35, it is essential to demonstrate that you are in business on your own account and have reasonable autonomy over the execution of the services. Other vital areas to consider are substitution, mutuality of obligation, financial risk, provision of equipment, and business-like trading.

It is recommended to consult with a qualified legal services provider to understand the intricacies of the Off-Payroll Working Legislation and determine your IR35 status accurately.

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