Contractor wins IR35 appeal representing himself

As a professional IR35 expert I would never advise a freelancer to handle his or her own IR35 case in front of the Commissioners. There is the old lawyers' adage that a defendant who defends himself has a fool for a client! But then the cynics would say that, as a professional, I would always advocate using a professional for help and advice!

However, I am delighted to be able to report that a freelancer has ignored that advice and has proved to be the exception to the rule.

The freelancer prefers to remain anonymous as he is still in the process of recovering the deemed PAYE and NIC from the Revenue. However, in a written judgement issued early in January, General Commissioners sitting in Yorkshire agreed with his view that his contract was one for services not of service.

For the sake of this report we will call him Victor and his company Victory Limited.

Change of heart

What makes this case even more remarkable is that this victory came after a change of heart by Victor. For the tax years 2000/1 and 2001/2, after advice from his former accountants, Victory Limited had submitted the form P35 on the basis that IR35 applied and the company paid over the PAYE and NIC on the resulting deemed salary.

It was only later in 2002, when Victor compared his position with other freelancers at the same client, that he decided he had made a mistake. In July 2002 his accountants contacted the Revenue and asked for the position to be reviewed, as Victor no longer believed that IR35 applied. In the spring of 2003 the Revenue completed their review of the contracts and the facts and issued a formal decision that IR35 applied. At this point Victor appealed.

Revenue Bullying?

One feature of the case appears to have been a degree of bullying by the Revenue – perhaps taking advantage of the fact that Victor was representing himself and his company. Victor reports that throughout the run up to the hearing the Revenue seemed intent on intimidating him and, at times, appeared to be trying to deliberately undermine or mislead him.

For example they dismissed his key witness – his team leader at his client – as irrelevant, perhaps because by the time of the appeal this manager had left his position with the end client. It was only after Victor insisted that they agreed to interview him. During the hearing itself the Revenue argued that this witness should leave the hearing once he had given his evidence but Victor was able to convince the Commissioners that his witness should remain in case he could shed light on any other issues that the Revenue might raise during the course of the hearing.

The Revenue also agreed to provide the necessary case law documentation, promising to let Victor have copies two weeks before the hearing. In the event the Revenue only produced the documents on the Friday before the case – after Victor had been forced to obtain his own copies. The Revenue also misled Victor about the due process before the Commissioners. They told him that all evidence and documentation had to be revealed to both sides at least seven days before the hearing. But, according to Victor, on the day of the hearing the Revenue produced several pieces of evidence that had not been previously shown to Victor.

Victor and his witness were concerned to find that the Revenue’s notes of their interview with the witness bore little resemblance to what they believed had been said at the interview. These notes had not been agreed beforehand with Victor or the witness and at the hearing they had to dispute the accuracy of their contents.

Victor’s view of the event is that “I was bullied and intimidated throughout the appeal process and during hearing day. I am absolutely disgusted by the way I was treated and do not trust the Revenue at all!”

The Case – background

As with the Tilbury case last autumn the Revenue probably thought they had good grounds for claiming that Victor was a disguised employee of his client. Victor had been contracting at the client, through Victory Limited, since Victory Ltd had been set up in 1994. The contract appeared to give the client a high degree of control over Victor and there was no stated right of substitution – the contract being silent on the issue.

The client in question was a large telecommunications business. Victory had had a series of contracts with the telecomm business. For the period in question under the appeal, between April 2000, when IR35 was introduced, and March 2002 an agency was involved. During this period Victory had not had any other clients or done any work in parallel.

Details of the contract are not set out in the Commissioners’ written decision but according to the written judgement the written contracts showed a significant degree of control by the end client over Victor.

Between April and June 2000 Victor was one of 5 freelance contractors managed by a third party project manager and on other contracts performed by Victory Limited, there were no permanent staff engaged.

The Commissioners’ judgement

In reaching their decision the Commissioners looked at classic status case law such as Readymix Concrete, Market Investigations and Hall v Lorimer. Their decision looks in detail at the key status issues of Control, Financial Risk and Investment, Substitution, and Mutuality of Obligation.

Their conclusions on the main issues make interesting reading.

Control

Despite the evidence of the contract itself the Commissioners accepted Victor’s evidence, as supported by the team leader, that the client’s effective control was “applied with a lighter touch”. The team leader confirmed that Victor’s situation differed from that of the client’s employees in a number of aspects. For example:

1] He had no arranged leave with the company.

2] He had no line manager, unlike the employee.

3] There was no strict control over how Victor delivered his projects, as the client was only interested in the end product

4] Instead of formal reporting procedures progress was discussed informally – usually over a coffee

When Victor wanted time off, out of courtesy he would discuss this with the team manager ”not being under the same constraints as other employees”. Despite the terms of the contract the team manager confirmed that Victor’s hours of working were quite flexible. He was not expected to work a standard day, the priority being that the project should harmonise with other projects and hit its target date for completion.

The Commissioners concluded that the control over Victor’s working arrangements “was less than was to be expected from an employer responsible in an employer/employee situation to an immediate superior”.

They also noted on the issue of integration within the client that Victor had no sick pay arrangements, he was not on the internal telephone directory and his building pass was different from that of an employee.

Financial Risk and Investment

The Commissioners recorded the Revenue’s view that in Victor’s case his risk was little different from that of an employee who is paid in arrears. But the Commissioners noted that they had regard to “the fact that his position differed from an ordinary employer/employee situation in that his company submitted an invoice and was dependant upon that invoice being met by (the client)”

The Commissioners also noted that, while not obliged to provide equipment under the contract, Victory provided Victor with a laptop and mobile phone for use during the course of the contract.

Substitution

Although the contract showed that Victor was the person who was required to provide the services under the contract the Commissioners accepted the crucial evidence of the team leader that a substitute could have been sent and would have been accepted.

Mutuality

The Revenue raised its usual arguments concerning the irreducible minimum of obligation necessary for a contract of service. The Commissioners accepted that most case law in the area revolved around workers who were trying to establish a minimum period of employment to qualify for employment rights and that the Courts were trying to establish whether there was a continuous contract or a series of contracts.

In this case the Commissioners considered that they could not ignore “the fact that there were a series of short term contracts governing particular projects which were renewed to coincide with the termination of one project and to cover a new and distinct project” and went on to note that it could not be assumed that ”there would be an automatic renew of those contracts”

In presenting his case Victor also drew the Commissioners’ attention to the decisions in the LimeIT and Tilbury cases and the parallels with his case. For example, as in LimeIT, Victor did not have the usual employee benefits such as holiday pay, sick pay, any bonus entitlement, pension rights or the same staff discounts on phones. As the Commissioners had already accepted Victor was not subject to the same supervision and control as an employee of the client and in practice he did not work the same hours as the client’s staff. In addition Victor pointed out that he paid for his own training and reference manuals.

Finally the Commissioners noted that on one occasion Victory’s contract with the client was terminated early when the work quoted for was no longer required.

Hence the Commissioners concluded that:

”the hypothetical contract construed in the manner required of them indicated to the Commissioners that (Victor’s) terms of work departed to such an extent from those of the normal employer/employee relationship as to show that he was in business on his own account and should not be treated as an employee under a contract of service ..”

Conclusions

This is a heart-warming decision for all of us who have laboured long and hard to provide freelancers with the knowledge and tools to fight against IR35. It appears to vindicate all we have said for years about the fundamental differences between a temporary employee and a freelancer selling their skills in the open market. Despite the length of service at the client the Commissioners have recognised that Victor is in business on his own account.

He has maximised his profits by staying as long as possible with a happy client, accepting a series of new contracts for new projects but always vulnerable to the work being terminated and with no certainty of a new contract.

He was not a disguised employee being supervised and directed on a day-to-day basis. He was a skilled professional engaged to provide solutions to problems and left to get on with the work subject only to the usual requirements of budgets and deadlines.

It is especially gratifying to see that, despite having ticked the yes box to question 6 on the form P35 for two years, Victory has still been able to reverse their position and, despite the Revenue’s clear attempts to derail the case, Victor has stuck to his guns and achieved this wonderful result.

The only disappointing aspect of the case is that as a General Commissioners’ decision it will carry little weight in other cases and sets no precedents. Nevertheless the Revenue will know what has happened and it is yet another defeat in a case they probably thought they should win.

Despite the speculation about IR591 it is probable that freelancers will be fighting IR35 cases for some years to come. All freelancers should take heart from this terrific victory. Hopefully at some stage in the future Victor will feel able to shed his anonymity and accept the thanks of the many freelancers who will be boosted by his stunning example.

It is now clear that the Revenue are not going to appeal the decision and Victory’s new accountants have submitted revised figures to the Revenue. Victor hopes to get the additional tax and NIC on the deemed salary refunded in the next month or so.

As a professional I still have to say that Victor took a great risk defending himself but the end result could not have been better.

Nevertheless, Victor may well feel that the satisfaction of achieving this win entirely by his own efforts quite outweighs the stresses that the last two years must have brought.

Kevin Miller, MA FCA