A veteran IT contractor won a partial victory against HMRC in an unusual split decision over IR35 tax status.
The first-tier tribunal heard the case of JLJ Services Limited v HMRC in November when John Spencer, an IT contractor with more than 40 years’ experience in the industry, appealed the assessment by HMRC that he was caught effectively an employee who should pay income tax and National Insurance Contributions on his pay from Allianz Cornhill Management Services.
Through his personal company JLJ, Spencer had provided programming services to Allianz, via a recruitment company over a period of eight years.
Under IR35 rules Spencer would have been taxable as an employee if the notional contract between him and Allianz was akin to an employment contract. Over the eight-year period at issue, HMRC assessed Spencer’s total tax liability at £141,000.
Shaky Substitution Clause
One of Spencer’s main arguments for being taxed as a contractor was that the contract under which Spencer provided his services contained a substitution right, which is usually an indication of a contractor relationship.
However, the tribunal emphasised that the substitution right was not unfettered, given that the contract provided that any alternative contractor put forward by Spencer could be vetted by Allianz, noted law firmed Mcgrigors. Spencer was so specialised that it would have taken any replacement a few weeks to be productive, the lawyers added.
The tribunal said that the substitution clause had “very little reality” and had been inserted in the contract for tax purposes. In his decision, tribunal judge Howard Nolan also noted that a substitute contractor for Spencer was not offered over the seven year period.
For the first three years of the project Spencer worked on projects for Allianz, but from 2004 it became clear that Allianz wanted Spencer’s services permanently. It no longer engaged him for projects, the tribunal said.
The tribunal concluded that for the first three years of his work for Allianz Spencer was a contractor, but from January 2004 he was in effect an employee of Allianz.
“Certainly from January 2004, it would have been appropriate to regard the notional relationship as one of employment,” the judge ruled.
“We put the dividing line at 31 December 2003 because it was at that time that he was offered indefinite work, and it was from that date that renewals were agreed on an annual basis, and from which no further reference was made to particular projects.”
Paul Mason, manager of the contractor division at Abbey Tax Protection, said the ruling was unusual because IR35 tax cases are usually “cut and dried”, with all of the work in a period under dispute either covered by IR35 legislation or not.
The tribunal ruling also showed that contractors who do general work for a client, rather than project-based work, and whose contracts are renewed every six months or year, become “part and parcel” of a client and are therefore more likely to be taxed as employees.
The first-tier tribunal heard the case of JLJ Services Limited v HMRC in November when John Spencer, an IT contractor with more than 40 years’ experience in the industry, appealed the assessment by HMRC that he was caught effectively an employee who should pay income tax and National Insurance Contributions on his pay from Allianz Cornhill Management Services.
Through his personal company JLJ, Spencer had provided programming services to Allianz, via a recruitment company over a period of eight years.
Under IR35 rules Spencer would have been taxable as an employee if the notional contract between him and Allianz was akin to an employment contract. Over the eight-year period at issue, HMRC assessed Spencer’s total tax liability at £141,000.
Shaky Substitution Clause
One of Spencer’s main arguments for being taxed as a contractor was that the contract under which Spencer provided his services contained a substitution right, which is usually an indication of a contractor relationship.
However, the tribunal emphasised that the substitution right was not unfettered, given that the contract provided that any alternative contractor put forward by Spencer could be vetted by Allianz, noted law firmed Mcgrigors. Spencer was so specialised that it would have taken any replacement a few weeks to be productive, the lawyers added.
The tribunal said that the substitution clause had “very little reality” and had been inserted in the contract for tax purposes. In his decision, tribunal judge Howard Nolan also noted that a substitute contractor for Spencer was not offered over the seven year period.
For the first three years of the project Spencer worked on projects for Allianz, but from 2004 it became clear that Allianz wanted Spencer’s services permanently. It no longer engaged him for projects, the tribunal said.
The tribunal concluded that for the first three years of his work for Allianz Spencer was a contractor, but from January 2004 he was in effect an employee of Allianz.
“Certainly from January 2004, it would have been appropriate to regard the notional relationship as one of employment,” the judge ruled.
“We put the dividing line at 31 December 2003 because it was at that time that he was offered indefinite work, and it was from that date that renewals were agreed on an annual basis, and from which no further reference was made to particular projects.”
Paul Mason, manager of the contractor division at Abbey Tax Protection, said the ruling was unusual because IR35 tax cases are usually “cut and dried”, with all of the work in a period under dispute either covered by IR35 legislation or not.
The tribunal ruling also showed that contractors who do general work for a client, rather than project-based work, and whose contracts are renewed every six months or year, become “part and parcel” of a client and are therefore more likely to be taxed as employees.
