HMRC claims victory in another IR35 dispute to sting Nationwide contractor for nearly £75k in back taxes

UK tax collector HM Revenue & Customs (HMRC) has won a case against a contractor who contested almost £75,000 in taxes and national insurance contributions under off-payroll rules.

Robert Lee contracted with Nationwide Building Society through his limited company, Northern Lights Solutions, between 2007 and December 2014, working on regulatory projects.

In February 2017, HMRC determined that despite charging for his services through a limited company, Lee was in effect a disguised employee of Nationwide. He was therefore liable to pay income tax and National Insurance contributions of £14,881 for his Nationwide contracts for 2012/2013.

Lee appealed the decision, arguing that he was legitimately providing contractor services. HMRC hit back by sending him a further bill for £33,277 for 2013/14 and £26,365‬ for 2014/15. Lee again appealed.

But the tax tribunal yesterday dismissed (PDF) Lee's complaint. In his ruling, Judge Ian Hyde sided with HMRC in categorising Lee as an employee of Nationwide. "During the time of Mr Lee's series of contracts with Nationwide, aside from the risk of not being engaged on a new contract (which happened rarely), he was not subject to any financial risk beyond that of an employee and in many respects, was part and parcel of Nationwide's operations," he wrote.

The case hinged on two aspects: Lee's right of substitutions; and how much control over his work he had.

The right to substitution requires contractors who charge for their services through limited companies to demonstrate that their end client does not need them to personally deliver the service. Any equally qualified individual must be able to deliver the services successfully.

Lee's lawyers argued that he had a contractual right of substitution. HMRC said that these rights could not be exercised in practice and that there was an obligation of the personal services of Mr Lee.

The tribunal accepted HMRC's arguments. Judge Hyde wrote: "The right to substitution was fettered with Nationwide having the final decision and effectively a right to veto. Nationwide wanted Mr Lee and in reality, would not accept a replacement. The contract was therefore one of personal service."

Lee's lawyers also argued that Nationwide did not have control over his day-to-day work and therefore he could not be considered an employee. HMRC argued that Nationwide had control over where Lee worked, when he worked, and how he performed his services.

Here, again, the tribunal sided with HMRC: "Mr Lee had more freedom as to how he carried out his role. Mr Lee could not be moved to another project and had considerable scope to manage the contracted project. However, apart from not being able to move him to another project, the level of control exercised over Mr Lee in how he did his job was not inconsistent with him being a highly skilled professional employee."

HMRC welcomed the judgement. A spokesperson said: "These rules ensure that the same amount of tax is paid when people work as employees, regardless of whether an individual works through a company."

Seb Maley, chief exec of recruiter Qdos, was less complimentary. "What this case does show is the needless complexity of the IR35 legislation, which has fine margins," he said. "Whichever party is tasked with setting status must realise there isn't much room for error, while the relationship between a client and a contractor needs to clearly reflect a business to business engagement, both in terms of the contract itself and the actual working practices – which can easily change over time."

Longtime IR35 critic and Contractor Calculator chief exec Dave Chaplin added: "This is a timely win for HMRC, but highlights further that firms need to conduct correct due diligence if they are to engage contractors, and not simply engage with them as extended employees."

The decision comes after HMRC lost two IR35 cases last year. TV presenter Helen Fospero won her case against the tax collector in November, escaping a tax charge of £80,000. A month earlier, a tribunal accepted IT consultant Richard Alcock's appeal against an IR35 decision that made him liable to pay almost £250,000 in tax and National Insurance contributions.

But HMRC has also won several high-profile cases recently. Earlier this year, This Morning presenter Eamonn Holmes lost his appeal against the tax authority for £250,000 in taxes owed for 2011/12 and 2014/15. Former BBC presenter Christina Ackroyd lost a similar appeal against HMRC, forcing her to pay £400,000 in outstanding taxes.

In September, HMRC won a case against three BBC freelance presenters, but was unable to recoup the combined £920,000 owed because the judges ruled that the presenters and their advisors had acted in good faith. ®