IR35 and S660 victory over Revenue
A contractor targeted by the Revenue for IR35 and Section 660, and his advisers, Bauer & Cottrell, are celebrating a double win. The freelancer had been with the same client for nearly five years.
Kate Cottrell of Bauer & Cottrell presents the case study:
"This case started in April 2002 when the Revenue opened an enquiry into the company's tax return for the 2000/2001 tax year. There were minor issues at stake such as travelling expenses but it was not until late December 2002 that the Inspector raised the issue of IR35 and simply sent a leaflet - IR75.
"On the basis that the freelancer had only offered services to one client, without any investigation of the facts of the IR35 case the Inspector decided that IR35 applied. Some six months after issuing leaflet IR75 the Inspector asked for more than £20,000 for IR35 for 2000/2001 and asked what the company was going to do about subsequent years.
"We were appointed to act and put a comprehensive IR35 technical argument to the Revenue in August 2003. This was put to the Status Inspector rather than the original Inspector. Interestingly this enabled the Revenue to open an Employer Compliance review.
"The case concerned a contractor offering specialist services to a Construction Management Company. The written contracts are brief and vague and although the first contains a right to substitute this important right was not included in the subsequent ones. The Revenue contended that because the Contractor has been with the same client for almost five years there is no financial risk, there is mutuality of obligation, the role amounted to a management role and one which made him part and parcel of the client's organisation. The Revenue also threw in questions about the role of the director's spouse, details of shareholdings and whether the distribution of dividends, were in accordance with the shareholdings.
"A technical debate followed wholly supported with case law precedent together with quotes from Special Commissioners (SC) cases that have influence. The recent SC case concerning Tilbury was used to support the fact that the length of engagement is not a crucial factor.
"The Revenue conceded the lack of mutuality issue once they were directed to the full text in their own manuals which states that there is a need to pay an individual even when no work is available for mutuality of obligation to be present.
"As to the management role, investigation showed that to satisfy the quality controls of the client the director had to be independent of the client. This point also served to show that it was impossible to be part and parcel of the client's organisation.
"The questions relating to the director's spouse were not answered at this stage but the Revenue was asked to explain their relevance to an IR35 case.
"IR35 was conceded but the review then turned to Section 660 with the Revenue wanting to deal with the Director's accountant over this issue. Bauer & Cottrell continued to deal with this and further technical debate followed. The Revenue has now accepted that all earnings and dividends paid to the director's wife are in order and NOT actually a right to the director's income.
"The original CT investigation is expected to be concluded shortly now that these major issues are resolved.
"IR35 and Section 660 affect all industries and all contractors and again the message is to seek professional advice as soon as possible."
Sarah Bauer and Kate Cottrell are ex Revenue and have an unbeaten track record in tax/IR35 status in the UK without going to appeal before the Tax Commissioners. Bauer & Cottrell