IT Contractor Robert Lee and his company Northern Lights have had his appeal dismissed against HMRC by Upper Tribunal. Dave Chaplin, CEO of ContractorCalculator offers his insights into the key lessons from the case.
HMRC has won a First Tier Tribunal (FTT) against IT contractor Robert Lee who contested almost £75,000 in taxes and national insurance contributions (NICs) due under off-payroll rules.
Lee worked on a range of regulatory projects for the Nationwide Building Society through his limited company, Northern Lights Solutions Ltd, over a seven-year period between 2007 and 2014.
The latest case highlights the importance of effectively communicating working practices, notably getting clients on board with substitution clauses, at an early stage and how Tribunal Judges can draw on partial sections of case law to reach their conclusion.
“It is unfortunate that the First-tier Tribunal did not fully appreciate the realities of how major IT projects work, how much autonomy project managers enjoy and the irrelevancy of change frameworks within a working project.,” said Dave Chaplin, CEO of ContractorCalculator.
“Many factors, including how the evidence was presented by HMRC and interpreted by the tribunal, as well as some surprising remarks around case law aspects of control and mutuality of obligation (MOO) made by the judges led to a somewhat unfair ruling in my view,” said Chaplin.
Here he points out the key lessons from the case:
- HMRC’s evidence from the notes of meetings, which underpinned several aspects of the ruling, appears to frame the facts relating to substitution and control in a manner which does not align with what really happens on the ground in IT projects, highlighting the importance of keeping a more robust and evidenced audit trail on projects in the new era of Off-payroll.
- In Chaplin’s view, the facts and realities of the working practices on IT projects and what they mean were not fully appreciated at FTT. It is important to have a pre-emptive defensible position prepared, in the event HMRC presents a version of events that does not match the reality and actual facts.
- The facts around the ‘how’ aspect of control, in Chaplin’s experience of running IT projects, was unlikely to reflect the actual working arrangements. ‘Change frameworks’ are a red herring and alongside reporting is not evidence of heavy control.
- A genuine expressed right of substitution, if not exercised and not backed up by the client, is still unsurprisingly not an IR35 defence. The judges relied on Lord Wilson’s dominant purpose test from Pimlico Plumbers.
According to Chaplin, Lee’s contract did include a legitimate unfettered right of substitution, but it was never exercised, and the client never gave witness evidence to back it up as a genuine right.
“The judges chose to disregard those substitution clauses,” said Chapline. “Substitution is no silver bullet to definitively proving a worker is not employed unless it has taken place. In the lead up to the private sector Off-Payroll reforms, we’ve seen all sorts of weird and wonderful misguided models emerge that are designed to game the case law solely around substitution.
“Whilst I have some misgivings about some of the conclusions drawn, the law appears to be correctly applied. However, many businesses are one-man bands and deliver their services personally. But that alone does not mean they are all employees. The more important point is control and Lee was clearly no ‘tail-end’ Charlie with no control over what he did,” said Chaplin.