HMRC has won a First Tier Tribunal (FTT) against an IT contractor who contested almost £75,000 in taxes and national insurance contributions (NICs) due under off-payroll rules
Robert 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.
In February 2017 following an HMRC investigation into his tax affairs, Lee was served notice to pay £6,078 of income tax and £8,803 of NICs relating to the tax year 2012/13, on the basis that he was in effect a disguised employee under the IR35 rules.
Subsequently, HMRC issued determinations for £19,613 of income tax and £13,664 of NICs in respect of the periods from 6 April 2013 to 5 April 2015 and £14,637 of income tax and £11,728 of NICs in respect of tax year 2014-15.
Lee appealed against all these determinations, and when he was unsuccessful took his case to the FTT. [Northern Lights Solutions Ltd and the Commissioners for Her Majesty’s Revenue and Customs, TC07594 [2020] UKFTT 0100].
The tribunal considered the nature of the contracts Lee had with the Nationwide, which were via two umbrella companies, and the question of whether or not he had a right to provide a substitute if he was unavailable for work, and how much control he exercised over his work.
Lee described it as his responsibility to determine the cost of delivering the project and when it could be delivered by. He would draw up a detailed plan of activity and then manage that plan until delivery.
Once the plan had been approved he would first establish the core members of the project team, and put together a plan of actions and tasks. Lee would initiate and chair weekly meetings of the core team to review that week’s tasks and forecasted tasks.
When Lee started a contract with Nationwide, there was no induction training on commencement of any of the contracts with Nationwide other than in relation to health and safety and no ongoing training.
Laptops were provided by Nationwide for security purposes but no other equipment. Lee would use a desk at Nationwide’s offices on a flexible basis, and did not provide any equipment beyond a home office and his own vehicle.
Lee was paid on a day rate and there was no entitlement to employee benefits such as holiday, sickness, pensions or any benefit in kind.
Each year the umbrella agency would be notified by Nationwide that as a contractor Lee would be unable to provide services during a furlough period of between two and three weeks covering mid-December to early January. If he did work during this period he would not be paid.
Lee’s representative argued that he did have the right to provide a substitute but Nationwide could reject the substitute if in its reasonable opinion such replacement is not wholly suitable (whether by reason of skills, experience, training, qualifications, authorisations or otherwise).
Lee’s evidence was that provided they had the right qualifications he would have expected Nationwide to accept a substitute.
The judged disagreed, stating: ‘I accept HMRC’s argument as to the practical limitations to the right of substitution.
I find Mr Lee was a specialist project manager very familiar with Nationwide’s business and its process and indeed was recruited for these reasons.
‘Accordingly, in practice providing a substitute that met the requirements for the right experience, security clearance and familiarity with the project meant that it was difficult for Mr Lee to offer a substitute that Nationwide acting reasonably would accept.’
The tribunal described Lee’s right to substitution as ‘fettered’ with Nationwide having the final decision and effectively a right to veto.
Lee’s lawyer also argued that there was no mutuality of obligation (which would be a hallmark of a contract of employment) as there was no continuing obligation on Nationwide to offer Lee work and no obligation on Lee to provide his services if required by Nationwide. Nor was there any obligation on Nationwide to provide other work should a project be cancelled or finish early.
Lee also sought to argue his business was exposed to financial risk if Nationwide chose to cancel a project or he was not able to provide his services, for example if he was on holiday or ill.
He was required to remedy any defect on his work at his own expense, which was not an obligation imposed on employees. If the project was not running to schedule Lee would be required to work additional unpaid hours.
HMRC argued that there was a mutuality of obligation including an expectation that the work would be available during the relevant contract periods. It was irrelevant that there was no expectation of further work beyond completion of a contract, the situation being no different to an employee on a fixed term contract.
As to when and where Lee worked, HMRC submitted that the flexibility he enjoyed about his hours and place of work were no different to other employees. He was required to work a professional day and if the project was not completed by a particular deadline he would be expected to work the additional hours to complete the work.
HMRC submitted that Lee was not in business on his own account and took no financial risk.
The judge agreed, stating: ‘In my view Mr Lee is taking very little financial risk and incurring little expense. He worked full time for Nationwide with a financial exposure very similar to a full time employee on a fixed term contract.
‘During the time of Mr Lee's series of contracts with Nationwide, aside from the risk of not being engaged on a new contract (which happened rarely), he was not subject to any financial risk beyond that of an employee and in many respects, was part and parcel of Nationwide's operations.’
As a result of its findings, the FTT dismissed Lee’s appeal.
HMRC welcomed the judgement. A spokesperson said: ‘These rules ensure that the same amount of tax is paid when people work as employees, regardless of whether an individual works through a company.’
HMRC has recently won high profile IR35 appeals against TV presenters Eamonn Holmes and Christa Ackroyd, leaving them with tax bills of £250,000 and £400,000 respectively.
