Seasons Greetings

see our Festive opening times

Contractor IR35 tribunal win throws CEST into disrepute

Contractor IR35 tribunal win throws CEST into disrepute

Fresh details from another contractor IR35 tribunal win in early 2017 suggest that HMRC knew its CEST tool was flawed before it was launched.

Engineering contractor David Armitage successfully appealed a tax bill in excess of £68,000 in January 2017. This came just weeks before the launch of CEST, according to a new report by Accounting Web.

As part of the appeal, the judge rejected HMRC’s notion that mutuality of obligation (MOO) applies to all contractor engagements. Yet HMRC subsequently omitted MOO from CEST anyway.

HMRC’s understanding rejected by judge

Armitage, an electrical control and instrumentation designer, contracted through his company Armitage Technical Design Services Ltd (ATDSL) and two agencies to provide services to Diamond Light Source Ltd (DLS).

HMRC claimed that the work Armitage performed between 2009 and 2014 fell within IR35. One of the reasons HMRC put forward was that the mutuality of obligation requirement had been met. They said that MOO was present simply because Armitage’s company agreed to provide services to another in exchange for payment.

But this was rejected by Judge Rupert Jones. “HMRC’s case is that where one party agrees to work for the other in return for payment, then this satisfies mutuality of obligation between the two parties,” he said. “That would be true of every contract, both employment and for services, otherwise the contract would not exist at all.

“The mere offer and acceptance of a piece of work do not amount to mutuality of obligation in the context of employment status.”

IR35 Tax Investigation & Liabilities Cover - From Just £120

Armitage won the appeal on the grounds that in a notional or hypothetical contract between himself and DLS, there are more factors that suggest it would be a contract for services (one of self-employment) than those which suggest a contract of service (one of employment).

Other factors which determined that Armitage was not operating within IR35 included:

Control

The DLS headquarters is located in Didcot. DLS wanted Armitage to be based at Didcot. Armitage declined and set himself up in Warrington, which was more convenient for both him and his family. This despite no one else from DLS working there, having been relocated to Didcot some time before. Armitage visited the DLS headquarters when required (only twice a year) to discuss new project work.

Part and parcel

Armitage received no employee benefits – no holiday pay, no sick pay and could not partake in any grievance procedures. Armitage never attended functions that other employees attended and was not invited to internal training courses. Further, he did not attend internal departmental events that were considered a requirement for employees of DLS (including social functions).

Flawed tool from the start

CEST is HMRC’s online tool designed to help determine workers’ employment status for tax purposes. But it has long faced criticism for providing inaccurate results. In March 2017, ContractorCalculator highlighted major flaws when it used the tool to judge a number of historic IR35 cases. Only 37% of cases returned a correct outcome.

HMRC has said that it intentionally omitted MOO from CEST. Yet the Armitage judgment was released a month before the launch of CEST, suggesting that HMRC’s understanding of MOO was unclear. More concerning still is that it blatantly ignored a judge’s recommendations.

“HMRC will have read this judgment and known its position was wrong, yet it went on to launch a flawed tool which has since been used by more than 750,000 taxpayers,” said Dave Chaplin, CEO of ContractorCalculator. “Every result that CEST has handed out should now be considered void, and the tool should be withdrawn with immediate effect. This is a calamitous situation for HMRC, and further reinforces why the reforms should not roll out to the private sector.”

Professional Indemnity Insurance - From £144.00