by Dawn Ford - Legal Counsel
In a rare IR35 victory for HMRC, the first tier tax tribunal has recently handed down its judgement in the case of Northern Lights Solutions Ltd v. HMRC. The facts of the case were that Robert Lee, a project manager had been working via his PSC (Personal Service Company) for the end client Nationwide Building Society. There had been a succession of contracts held between Northern Lights Solutions and Nationwide between 2012 and 2015 and although there were gaps, this effectively amounted to almost 3 years full-time work with the same client. Those contracts had been declared as being outside of IR35. HMRC contested this and had levied a tax bill in excess of £70k.
In its evaluation of the case, the tribunal agreed that little control was exerted over the worker on a day to day basis and if Nationwide had a new project they wanted this worker to be involved with, that would have to be handled under a new contract.
However, on balance the tribunal concluded that the Nationwide’s need, as a highly regulated business, to monitor the progress of the relevant project meant that there was overarching control.
Wisdom is always easy with hindsight. Back in 2012, I would suggest that no bank would have given much thought to IR35. And why would they? At that point in time the sole decision making authority rested with the PSC. If the PSC got it wrong, either innocently or fraudulently, the risk to the end client was almost non-existent unless they’d been complicit in misleading HMRC.
Fast forward to 2019 and we saw a succession of banks coming out, quite early in the process, and stating that all their PSCs would be inside IR35. Now yes, banks are naturally cautious beasts and that is part of the reason for that choice, but the main reason is that banking is a highly regulated industry and the end client has a duty to ensure compliance with those regulations. Part of that means that workers in that industry are subject to much greater control than they would be in other industries.
Had Mr Lee known this when he first opposed HMRC’s tax bill, I think he might have been more circumspect about going to tribunal, because knowing what we do now, this outcome is not much of a surprise.
It is worth noting, albeit in comments made in obiter, that the tribunal did briefly consider the now infamous MOO – mutuality of obligation – in my view rightly pointed out that a contract existing today is no proof that any contract will exist in the future and therefore a PSC contracting with a client today is no proof that any extension or new contract might be offered or accepted in the future. While it’s not the major battleground that substitution has become with the CEST tool, it is another example of the problem that what HMRC says is not representative of what case law has previously determined.