Richard Alcock, director and owner of RALC Consulting Ltd, celebrated a victory against HMRC that was 5 years in the making. The IR35 case that spanned half a decade was finally closed last week after Mr Alcock won his appeal; he fought the taxman’s claim that he owed an eye-watering £243,324 in income tax and National Insurance Contributions (NICs) accumulated between April 2010 and April 2015. The case, defended by Chris Leslie of Tax Networks Ltd and assisted by Dave Chaplin of Contractor Calculator, was decided largely on mutuality of obligation – or, rather, lack of it – across Mr Alcock’s contracts during that period. It’s also been compared to that of the Jensal Software Ltd v HMRC case, as defended by Larsen Howie’s Head of Tax Andy Vessey ATT.

RALC Consulting wins IR35 appeal

During the five years between 2010 and 2015 that were the focus of HMRC’s enquiry, Alcock contracted for both Accenture and the Department for Work and Pensions, mainly working on the Universal Credit IT project. The taxman attempted to charge Alcock £164,482 and £74,842 respectively in owed income tax and NICs for those engagements. 

However, as reported by Contractor Calculator, the tribunal ruled that it was "satisfied on balance that the hypothetical contracts between Mr Alcock and his end clients, DWP and Accenture, would be contracts for services (self-employment)".

The statement's conclusion read: "All HMRC's Determinations, decisions and notices are cancelled. The Appellant is not liable to pay the Income tax and NICs assessed by HMRC. The appeal is allowed in full."

The statement's conclusion read: "All HMRC's Determinations, decisions and notices are cancelled. The Appellant is not liable to pay the Income tax and NICs assessed by HMRC. The appeal is allowed in full."

RALC Consulting won its appeal largely based on Mutuality of Obligation (sometimes referred to as ‘MOO’) – a key IR35 status test that’s often overlooked by HMRC and entirely neglected in their Check Employment Status for Tax (CEST) tool. Judge Rupert Jones, who presided over the appeal, commented particularly on the fact that Mr Alcock’s contracts didn’t point to any ongoing obligation from either party to provide or complete work, meaning that they fell outside IR35. 

The importance of Mutuality of Obligation in IR35 determinations 

Chris Leslie commented on the importance of MOO after the tribunal win. "His [Mr. Alcock’s] contract specifically states that he can only charge for any work completed," Leslie said. "And to top it off, in one instance they did cut the project short at a moment’s notice, and he was not paid. There is no question at all that he could charge just for making himself available, and neither was the client obliged to give him work or allocate work – the work has already been agreed upfront.”

He continued: "Since there was no minimum obligation to provide work and no ability to charge for just making himself available, it is clear that the key elements of mutuality, in the work/wage bargain sense, are missing, and therefore he cannot be considered an employee.”

Matt Tyler, ex-Qdos IR35 specialist and current Larsen Howie IR35 Consultancy Manager, explains why Mutuality of Obligation played such an important part in RALC Consulting’s tribunal win. 

“This excellent result for Mr Alcock only goes to show the importance of Mutuality of Obligation in determining IR35 status,” Tyler states. “It proves, once again, that MOO cannot be ignored as HMRC seems to be so adamant on doing.”

“HMRC’s opinion on Mutuality of Obligation is that if you accept payment in exchange for labour then you are indicating employment. This is simply not the case, as has been demonstrated here and also in the Jensal Software case,” he continues. “In my eyes, the result only goes to show the value in having an IR35 review performed by an expert rather than relying on an automated system (particularly CEST) as such systems may well miss the nuance that an expert would pick up on.”

“I also find it interesting that Judge Jones found evidence provided by HMRC lacking as it was not signed off by the client. That helps show the importance of ensuring that any evidence gathered to support your status is, where possible, supported by the client as this will work in your favour.”

Financial risk also places RALC Consulting outside IR35 

Whether the contractor’s limited company faces any financial risk or not is another IR35 status test that shouldn’t be overlooked. This is a solid indicator of genuine self-employment, as employees would never risk losing income due to lack of work or any mistakes made in the course of their day – they’re paid a salary regardless. 

During the tribunal, one instance was described where the Universal Credit project was halted and Mr Alcock had to decide whether continuing his contracted work was financially viable. In his submission, Alcock said that "this was an extremely political and contentious move and several weeks of debate and options analysis followed. While this discussion took place and with no firm decision, I decided to continue to support the programme at RALC's risk and continued to work into January 2013.”

"I was hopeful that the decision would be overturned, that Accenture would have their contract extended and that RALC would be rewarded with a new contract,” he continued. “Unfortunately, this did not happen and ultimately RALC stopped work and was not paid for around 10 days of my effort. The contract was brought to an end in January 2013."

RALC Consulting and Jensal Software: similarities between the IR35 cases

As previously mentioned, there have been comparisons drawn between the Jensal Software case and that of RALC Consulting. Andy Vessey ATT, Head of Tax at Larsen Howie and Jensal Software defence, comments. 

“I note that it’s been reported that the case hinged on MOO and control, which was the same in Jensal,” Vessey says. “That being the case, HMRC should have recognised this and withdrawn from the proceedings, but they have once again wasted taxpayer’s money. The article published by Contractor Calculator implies that RALC had no assets with which to pay the tax and NIC should it have lost at Tribunal. HMRC would have known this, therefore the only reason they would have proceeded to Tribunal would have been to establish a particular point(s) of status.”

“In the Jensal case, Judge Jennifer Dean took the view that although Ian Wells (director of Jensal) provided his services for payment, MOO did not of itself demonstrate a contract of service,” he continues. “The DWP paid Jensal a daily rate by reference to a daily work minimum of 7 ½ hours. However, the judge considered this no more than an expectation as to the hours that would be worked each week.”

“Each of Jensal’s contracts were for short durations and there was a break of approximately 2 weeks between the penultimate and final contracts which indicated there was no contractual obligation for the DWP (end client) to provide continuous work. Indeed, no further work was offered for a short period. It was also clear that the contractor’s engagement did not extend beyond the specific project for which Jensal were engaged and once the task was completed there was no role for Jensal to fulfil. Mr Wells (director of Jensal) was under no obligation to perform the work and Jensal terminated the final contract when a better offer presented itself.”

Prepare for the private sector IR35 reform

RALC Contracting’s IR35 victory is yet more proof that the genuinely self-employed can still be engaged with minimal risk – provided end-clients and recruiters take care over status determinations. We’ve written before on why many of the private sector corporates making blanket determinations or pushing all contractors to PAYE could be shooting themselves in the foot; this case shows that a flexible, skilled workforce is still very much a viable option for businesses, should they make the effort.

This case also highlights, once again, why HMRC’s ‘recommended’ CEST tool should be avoided when making IR35 status determinations. It’s important to remember that there are other options available that are just as valid and will provide a more accurate, comprehensive, and considered result. 

Larsen Howie offers a range of contract and working practices reviews – you can find out which option would be best for you here. We also offer IR35 investigation insurance with representation from Andy Vessey ATT, should it go to tribunal.

For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news and contractor guides.

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