The recent decision of the Upper Tribunal (UT) in RALC Consulting Limited is relatively unusual. For starters, unlike many IR35 cases, which involve entertainers and household names (such as Lorraine Kelly), this one focused on the less glamorous, but much more common, field of IT consultancy.
The UT’s decision also means that the taxpayer is effectively back to square one – with his case being sent back to the First-tier Tribunal (FTT) to be considered again.
The taxpayer in question will therefore have to wait longer to find out whether IR35 does or doesn’t apply. However, in the meantime the decision highlights some important points to consider when looking at other contractor scenarios.
The background
The case centred on work that an IT contractor - Mr Alcock – undertook for Accenture and the Department for Work and Pensions (DWP) between 2010 and 2015.
Instead of working directly for these clients, Mr Alcock provided his services through a company of which he was the only shareholder and director – RALC Consulting Limited (‘RALC’). RALC signed contracts with agencies for the provision of Mr Alcock’s IT expertise, and the agencies in turn signed contracts with Accenture and the DWP.
HMRC argued that IR35 applied to the arrangements, resulting in an income tax and NIC bill of nearly £250,000 for RALC.
RALC appealed to the FTT, who found that IR35 did not apply. Following an appeal by HMRC, the UT has now put aside that decision. But instead of answering whether or not IR35 applies, the UT has directed the FTT to look at the case again.
The IR35 rules
For the IR35 rules to apply, broadly there has to be:
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an individual (the worker) who personally performs services for another person (the client);
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instead of a direct employer-employee relationship, the services are provided through an arrangement involving a third party (the intermediary); and
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if the services had been provided directly by the worker to the client, the worker would be regarded for tax purposes as an employee of the client.
The third part of this test is often the most difficult to apply in practice, and is a key focus in many IR35 cases (including this one).
Deciding whether someone is an employee for tax purposes is difficult as there is no legislative test. Instead, the following ‘employment status tests’ have developed from various cases over time:
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Mutuality of obligation – are there sufficient obligations for the client to provide work and for the worker to perform that work?
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Control – does the client have sufficient control over the worker for the relationship to be employment?
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The wider picture – even if there is sufficient mutuality of obligation and control, does the overall arrangement look more like employment or self-employment?
What happened with RALC?
HMRC argued that, if Mr Alcock had contracted directly with Accenture / DWP, he would have been an employee for tax purposes, and that IR35 therefore applied.
The FTT disagreed, primarily on the grounds that there was not sufficient mutuality of obligation.
The UT has now overturned that decision, mainly because they felt the FTT did not approach the question correctly. As the UT set out in their decision, when looking at whether IR35 applies you have to carry out the following steps in order:
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Determine what the terms of the actual contracts are, and identify any other relevant circumstances within which the individual worked.
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Identify what the terms of the ‘hypothetical contract’ directly between the worker and client would have been.
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Consider whether that hypothetical contract would be one of employment or not by applying the employment status tests.
In their original decision, the FTT did not appear to have followed this approach, instead applying the employment status tests to the actual contracts. The UT felt this was enough of an error in law that the original decision of the FTT should be put aside and remade.
The UT also disagreed with the FTT’s conclusion on mutuality of obligation. In particular, the UT was clear that:
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Just because a client is not obliged to provide further work, or the worker to accept any further work, it does not mean there is no mutuality of obligation in an engagement where work is offered, that work is done and the worker is paid.
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The lack of guaranteed minimum hours of work, and the ability of the client to terminate at will, do not necessarily mean there is no mutuality of obligation.
What does this all mean?
The UT has ordered the FTT to look at the case again, following the correct steps set out above. However, the UT were keen to stress this does not mean that they think the case should be decided in HMRC’s favour – rather that the FTT should start from scratch and look at the relevant facts and tests afresh.
This is no doubt frustrating for all parties involved – especially the taxpayer who now has to wait even longer (and incur additional costs) to find out if they will have additional tax to pay.
The decision to send the case back to the FTT also means that we do not yet have a binding decision as to how the IR35 rules might apply to an IT contractor, as opposed to a TV presenter or other media star. However, in the meantime, the decision does make a few things clear. In particular, those making a decision on IR35 need to follow the steps established in previous cases carefully. Key to these is thinking about what any hypothetical contract would look like, and not just focusing on the actual contracts in place.
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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