IR35 regs highlight need to clarify employment status

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HR has been warned that HMRC are likely to challenge the status of more consultants following changes to IR35 regulations.

Matt Jenkin, partner and head of employment law at Moorcrofts, said the changes to IR35 regs meant HMRC are now more willing to question people who provide their services to end-user clients via their own personal service companies. 

He told HR magazine: “Whilst there have been some high-profile cases in which IR35 has been held not to apply, this decision is a useful reminder that this will not always be the case and that the application of IR35 is very much fact dependent. 

An IR35 tribunal case in May highlighted the importance of identifying the nature of a person’s employment status, as they could end up owing HMRC a large sum of money.

Robert Lee, an IT contractor who provided services to Nationwide Building Society, has been ordered to pay £74,523 in income tax and National Insurance Contributions after losing an IR35 appeal.

 


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Lee managed projects for Nationwide, under the company Northern Light Solutions, over different periods from 2007.

However, he argued against a ruling that identified him as an employee of the building society.

On 6 and 7 May 2021, a tribunal denied his appeal after it ruled Lee would have been considered an employee of Nationwide during these periods according to section 49 of the Income Tax (Earnings and Pensions) Act 2003.

It found that the circumstances of the employment relationship would have still existed if Lee was providing his IT services directly, rather than through Northern Light Solutions.

A Nationwide spokesperson told HR magazine the organisation takes every aspect of an individual employment into consideration when deciding if they are self-employed or not.

They said: “Since April 2021, the responsibility to determine IR35 status is on the end-user and as such we carefully consider, on a role-by-role basis, the IR35 requirements for any contractor in line with the applicable UK tax legislation.”

Doreen Reeves, employment lawyer at Slater and Gordon, said the interplay between employment status and IR35 is vital.

She told HR magazine: “The IR35 regime has teeth in order to crack down on the avoidance of tax and national insurance by using intermediaries.

“In this case, the tribunal went behind the written contract and considered the reality of the relationship between the parties to determine whether Lee was an employee or in business on his own account.

“The main factors for a contract of employment includes personal service, mutuality of obligation and control which are the minimum requirements.”

Reeves said other factors which can be considered are pay and financial risk, paid per job or by commission only, integration into the business, nature of engagement and exclusivity of contract.  

She said: “Nationwide exercised day to day control over Lee and he was not subject to any financial risk.

“The two years which were the subject of the appeal, signalled an employment relationship and although Lee precluded his personal service, in reality this would not have been allowed by Nationwide given his knowledge of their affairs.”

Reeves said this case is a clear reminder that the tribunal will look closely at the true nature of the relationship to identify employee status regardless of the labels that the parties attribute to their relationship or the terms of the contract.