The threat of an enquiry from HMRC is sure to spark concern in all contractors. No matter how much experience you’ve had with IR35, the conversation surrounding HMRC’s treatment of the legislation seems convoluted and inconsistent.

To help clear up some of the confusion, and to provide a better understanding of what could potentially swing the balance between landing inside or outside of IR35, our Head of Tax Andy Vessey gives us a play by play of two different enquiries he closed down on behalf of two self-employed commercial pilots.

The first enquiry Andy details is on behalf of a commercial pilot that's requested he and his limited company stay anonymous. This is followed by the enquiry of Arni Hilton contracting through Eagle Flight Limited.

How our first pilot client was found to be outside IR35

Limited Company Background

For the purposes of this case study, we'll call our first client Pilot One, and his limited company Pilot One Ltd (POL). Pilot One Ltd was incorporated in July 2011 and during the period of enquiry was providing pilot services to a private jet hire and charter firm.

Pilot One Ltd had ceased trading on 31.10.18, as Pilot One (director of POL) had become a permanent employee of said private jet hire and charter firm and had moved to Malta to reside and work. Pilot One's employment with this firm was very different from the pilot services he was providing previously as a contractor.

POL remained dormant but had assets of less than £1K.

POL had a direct contract with the firm, the terms and conditions of which had remained unaltered since December 2015.

Timeline of IR35 enquiry

  • Enquiry opened on 13.09.19 into tax year 2018/19. Pilot One approached Larsen Howie (LH) in mid-October to represent his company for the duration of the enquiry.
  • Deadline for response to HMRC opening letter was 19.10.19, so Pilot One obtained an extension until the end of November.
  • Following telephone and e-mail conversations, Pilot One provided detailed information and robust evidence to enable me to respond in full to HMRC’s opening letter, which I did by e-mail on 02.12.19.
  • Nothing more was heard from HMRC until 06.03.20 when they formally closed the enquiry affirming that IR35 did not apply to POL’s contract with the firm.

Observations on how POL avoiding going to tribunal

I was pleasantly surprised that HMRC did not test POL’s evidence further as is normally the case. Also, the nature of POL’s trade and the highly regulated environment it operated in led me to think HMRC would not be easily persuaded. However, it could be that because Pilot One was a non-UK resident and his company had few assets remaining in it, that HMRC concluded there was little point in pursuing the matter. That said, I have known the department to continue with enquiries when they know there is little or no prospect of them securing additional tax revenue if they were successful.

Pilot One produced some quality information and evidence that enabled this enquiry to be closed down in a relatively short time. He remained patient and trustful throughout the enquiry which is a great help to any tax practitioner in these circumstances. Any tax enquiry is stressful for an individual due to the uncertainty the situation creates but Pilot One handled it perfectly.

IR35 status deciding factors 

  • POL possessed a genuine right of substitution which was confirmed by a CEST determination that Pilot One had undertaken. Furthermore, in 2016, POL invoked their right of substitution by appointing another PSC to undertake some of the pilot services on their behalf. This was supported by a copy of the replacement workers’ invoice to POL. Whilst this happened before 06.04.18 the right remained as per the contract ;
  • POL was at liberty to refuse work offered and had done so in the past. This was supported by a copy of POL’s time record for work dated February 2014 that demonstrated this. Whilst this happened before 06.04.18, POL’s right to decline work remained;
  • POL controlled the manner in which they delivered the services;
  • Risk of late payment of sales invoices. POL’s sales invoices were heavily scrutinised which often resulted in payment being delayed beyond the end of the month. However, POL was entitled to charge interest on late paid invoices demonstrating that the agreement between the two parties was truly commercial; and
  • Non-entitlement to employee-type benefits.

How Eagle Flight Ltd (EFL) was found to be outside IR35

Limited Company Background

EFL was incorporated in January 2014 and during the period of enquiry was providing aviation services to IFLY, a Swedish company, who manage and operate private business jet aircraft for both private and charter flights.

EFL had a direct contract with IFLY, the terms and conditions of which had remained unchanged since February 2014.

EFL not only provided the services of Arni Hilton (AH - director of EFL) as a pilot but also industry advice and ground training. In fact, the services were varied, including industry consultancy and advice, crew co-ordination training and customer service training. Approximately 60% of the services related to pilot activity and 40% were dedicated to ground-based activities.

Timeline of IR35 enquiry

  • Enquiry opened on 16.09.19 into tax year 2018/19. AH approached LH in around late September/early October to represent his company for the duration of the enquiry.
  • Following telephone and e-mail conversations, AH provided thorough information and robust evidence to enable me to respond in full and in great detail to HMRC’s opening letter, which I did by e-mail on 24.10.19 (deadline was 25.10.19).
  • On 26.11.19 I received an e-mail from HMRC posing six questions surrounding mutuality of obligation, non-exclusivity, right of control and substitution. After consulting with AH a full response was e-mailed to HMRC 06.01.20.
  • Nothing more was heard from HMRC until 18.03.20 when they formally closed the enquiry affirming that IR35 did not apply to EFL’s contract with IFLY.

Observations on how EFL avoiding going to tribunal

Just like FBL, with AH being a pilot, I was pleasantly surprised that HMRC did not choose to pursue this case in any more detail, although I was confident that the contract was ‘outside’ IR35. 

AH produced some quality information and evidence that enabled this enquiry to be closed down in a relatively short time. As with Kyle Brown of FBL, AH remained patient and trustful throughout the enquiry which, again, is a great help to any tax practitioner. As you can imagine, tax enquiries can be stressful for any individual but AH handled it perfectly, particularly given the fact that he also had to contend with having to undergo surgery to a serious neck injury in January that prevented him from flying.

Although the end client was not called upon by HMRC to provide information about EFL’s working practices, IFLY was more than willing to do so and were very supportive of AH. With this in mind, I always felt confident of achieving a successful outcome in the enquiry.

I had AH completed LH’s working practices questionnaire which was then presented to HMRC as part of our evidence. This certainly helped limit HMRC’s subsequent questions, i.e. only 6.

IR35 status deciding factors

  • EFL possessed a genuine right of substitution which was confirmed by a CEST determination that AH had undertaken;
  • EFL was at liberty to refuse work offered and had done so in the past;
  • EFL controlled the manner in which they delivered the services;
  • Contract with IFLY was non-exclusive and
  • Non-entitlement to employee-type benefits.

Summary of IR35 cases

It’s clear from both enquiries that being proactive in tackling HMRC with professional help is the best course of action. Andy Vessey also reinforced just how important and helpful it was for him that both contractors from these enquiries remained calm and helped him collect as much information as possible to defend themselves. 

How Larsen Howie can help you in an IR35 investigation

Here at Larsen Howie, we offer IR35 investigation insurance that protects from the potentially devastating effects of an enquiry carried out by HMRC. Both our IR35 tax investigation insurance and IR35 tax & liabilities investigation insurance policies include the provision of Andy, one of the UK’s leading tax experts, as defence should you need to go to trial.

While these forms of insurance are key to protecting your business from HMRC, you should also make sure you know your employment status. We offer comprehensive IR35 contract and working practice reviews to help you better understand your situation and guidance on how you can make any necessary improvements to keep you on the right side of the legislation.

For more information on how insurance can help support you as a contractor, feel free to visit our Knowledge Hub where you’ll find helpful articles on everything from contractor guides to industry news. If you’re ready to begin protecting your business with an insurance package, find out about the kinds of IR35 insurance we offer here or get in touch.

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