Between 2010 and 2015, Richard Alcock provided services to management consultancy and professional services firm, Accenture, and the Department for Work and Pensions (DWP) under his limited company.
HMRC claimed that the work Alock provided was inside IR35, but in 2019 Alcock successfully appealed that view.
A first-tier tribunal found that IR35 did not apply to the contracts between Alcock, Accenture and the DWP.
The tribunal ruled that Alcock operated as a business in his own account, and that his services were not controlled by Accenture and the DWP in a manner that reflected employment.
HMRC appealed the first-tier tribunal decision on the grounds that it had not considered the working reality of Alcock’s services, rather than the contractual agreement. The case is now being reheard.
Seb Maley, CEO of IR35 consultancy Qdos, noted that HMRC looks at the working practices of contractors, rather than the contract, during an investigation.
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Speaking to HR magazine, he said: “Very often, when HMRC launches an IR35 investigation, it will focus on working practices, given these typically offer a more accurate picture of IR35 status.
“If the contract and working practices don’t align, then there’s a risk that the contractor is working under the wrong IR35 status.”
Martyn Valentine, chief legal officer for IR35 Pro, told HR magazine that this case showed the importance of ensuring that contracts are reflective of the work being done.
He said: “What this case illustrates yet again, along with all the other cases that have been held to be inside IR35, is that it is absolutely essential from day one to make sure that the contract reflects the reality of the engagement, otherwise there is a much higher risk of an engagement becoming the victim of a contentious HMRC inquiry in future.”
New rules for IR35 came into force on 6 April 2024, which meant that employers will no longer be double taxed for incorrectly classifying the status of contractors.
Rebecca Seeley Harris, IR35 advisor at Regal Consulting, noted that employers can use resources to ensure that they are compliant under the off-payroll working rules.
She told HR magazine: “This a historical IR35 case from when the contractor made the assessment. Now we are under the off-payroll working rules, business will be pursued by HMRC.”
“You need to make sure you are compliant. A good place to start is HMRC’s new Help to Comply manual (GfC4), or get expert advice. This is not an area of law to try and grapple with on your own.”
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Waqar Shah, partner and head of tax disputes at law firm Kingsley Napley, told HR magazine that employers should ensure they are aware of what contractors are doing at all times.
Shah said: "One of the key things for employers is to make sure, through ongoing monitoring, that they are aware of what contractors are doing.
"Reality can quite easily (and quickly) shift away from what the contractual position is, which can cause significant issues, particularly where such changes show more of the hallmarks of an employer-employee relationship.
"Given both the worker and the deemed employer can be assessed for additional tax (along with related interest and penalties), this is not an area where responsibility can be shifted solely on to a worker."
Valentine explained that contracts should include a service description that refers to an end point for the contracted work.
He suggested: “Where a recruiter is involved in the supply chain, the recruiter is responsible for making sure that the instructions given to the contractor in the services description of the contracts properly sets up the services to be provided.
“It is dangerous to rely on a role-based description because it is negligent to approve contracts outside IR35 when the services requirement refers to a role; that means that's employment in all but name. The service description has to refer to a package of end points or completion criteria in order to set out a project.”
Valentine added that employers should seek legal advice before engaging a contractor, to ensure that working practices do not change.
He continued: “What is fundamentally important is to get legal advice from day one, or before the start of the engagement ideally, to make sure that the contracts align with the intention of the parties, and that the engagement has been managed on an ongoing basis."
