IT Contractor loses IR35 case

02 Sep 2021

By Emma Williams, Associate Tax Consultant

In July 2021 an IT contractor lost his second appeal in 18 months against an IR35 decision that will result in him paying £70,000 in unpaid taxes. Unlike the BBC IR35 cases that have been in the headlines lately, this case is more relatable and relevant for most contractors.

IT Contractor loses IR35 case

Mr Lee provided IT services to Nationwide between 2012 and 2014 through his personal services company Northern Lights Limited. The original appeal decision concluded that Mr Lee should have been treated as inside IR35 between 2012 and 2014 while engaged by Nationwide Building Society and this was upheld by the upper tribunal in the second appeal.

The case was lost on the key IR35 status tests.

Substitution – Mr Lee’s contract included the right of substitution, which can be important in demonstrating outside IR35 status. The issue here however was that this right was never exercised due to the strict checks required in the banking industry. 

Mutuality of obligation – simply put, the client (in this case Nationwide) is obliged to provide the worker (Mr Lee) with work, and the worker is obliged to accept it.  This was found to exist in the working relationship, albeit only for the duration of the individual contracts. The judge found that the obligation was consistent with that of an employment contract.

Control – it was concluded that Nationwide ultimately had control over the way in which Mr Lee provided his services, to the extent that it wasn’t “inconsistent with a contract of employment.” Mr Lee was bound to a 7.5 hour working day by Nationwide.

What can contractors learn from this IR35 tribunal?

  • IR35 is not always black and white. Contractors unsure of a decision made by their client should have their status assessed by an independent expert.

  • Status is decided on multiple factors and simply having the right of substitution will not ensure an outside IR35 determination. Contractors need to focus on all aspects of the legislation.

  • Despite the introduction of IR35 reform and the much talked about “light touch” approach, HMRC will continue to police IR35 compliance among contractors and clients.

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