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IT contractor loses £70,000 IR35 battle at Upper Tier Tribunal

It has come to light that a contractor has lost a second IR35 tribunal appeal in less than 18 months – a result which has left this project manager with a reported tax bill of £70,000. The case, which was heard at the Upper Tier Tribunal (UTT), focused on the service provided by Robert Lee’s […]

By Emma Tait-Barber on 22 Jun 2021
Read time: 3 minutes

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It has come to light that a contractor has lost a second IR35 tribunal appeal in less than 18 months – a result which has left this project manager with a reported tax bill of £70,000.

The case, which was heard at the Upper Tier Tribunal (UTT), focused on the service provided by Robert Lee’s limited company, Northern Lights Solutions, to Nationwide Building Society between 2012 and 2015.

Having had his appeal at the First Tier Tribunal (FTT) rejected in February 2020, Mr Lee chose to challenge the verdict again at the UTT. But despite working under a contract that included the right of substitution, the tribunal judges agreed that Mr Lee’s assignment belonged inside IR35.

In large part, this was because the substitution clause in his contract wasn’t seen as genuine. The FTT court notes state that a substitute “would not get through security, they would not have a laptop nor knowledge of the work.” As a result, “the reality was that it was not going to happen.” The UTT agreed.

Mutuality of Obligation (MoO) was also said to exist in the relationship, to the point where Mr Lee had obligations similar to an employee. Nationwide exercised a high level of control over Mr Lee too, who was expected to work the same hours as employees and report into the company’s office on occasions.

Given the details of this case have been well covered in industry press, our very own in-house compliance expert, Jo Harris, looked at what HMRC’s win could mean for contractors.

IR35 isn’t always straightforward

Having pored over the court notes, industry experts have suggested it was a narrow win for HMRC. This is in spite of the fact that Mr Lee’s contract failed each of the key status tests – Control, Personal Service and Mutuality of Obligation (MoO).

“Without doubt, the case highlights the complex nature of IR35 and shows not all status decisions are black and white,” explained Jo, who added: “This is something contractors may want to bear in mind if they have any doubts over the determination made by a client.”

Right of substitution proves key

Mr Lee’s appeal was based on the right he had to send a substitute to deliver the services in his place – and substitution can be important in showing that a contractor isn’t providing personal service like an employee.

However, in this scenario, the FTT rejected the substitution clause because of the “very strict checks” that would have to take place for someone else to carry out the work. The UTT upheld this decision.

Here’s Jo’s take: “It was clearly difficult for Mr Lee to exercise his right to substitute – and we’ll never know if in doing so he would have won his appeal. However, it certainly would have strengthened his argument, as it will for other contractors looking to show they do not provide a personal service.”

Non-compliance can be costly

To conclude, Jo explained that:

“The £70,000 owed by Mr Lee to HMRC in Income Tax and National Insurance Contributions just goes to show how costly non-compliance can be – and not just for contractors either. This applies to medium and large businesses and public sector bodies engaging these workers, who are now responsible for making IR35 determinations and also liable for mistakes.”

So what now for Mr Lee? Will he look to overturn this decision for a third time, through The Court of Appeal? It remains to be seen, but there’s no doubt that this case has caught the attention of contractors, who will be watching closely to see what happens next.

For more information and to find out how to demonstrate your outside IR35 status, as well as IR35 determinations, check out our IR35 resources page.

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