Qdos IR35 Success at General Commissioners

An IT contractor represented by Qdos Consulting has won his long-running battle with the Revenue at an appeal hearing before the General Commissioners, on the subject of his status under the Intermediaries Legislation, known as IR35.

Had the appeals been lost, a period of nearly five years would have been subject to the "deemed payment" rules, under which all of the company income from a "caught" engagement has to be treated as if it were the personal salary of the worker and subjected to PAYE Income Tax and National Insurance Contributions. The contractor had been expecting an overall tax bill of some £60,000.

The local Status Inspector had trotted out the predictable Revenue contentions in such cases:

o    As the right to substitution had not been exercised, it could be disregarded.
o    It was to be doubted whether a substitution of the worker would be a practical
      possibility.
o    The end client really wanted the personal service of an individual, rather than the
      services of a company.
o    The end client had the right to control the worker as if he were an employee.
o    There was no real financial risk or opportunity to profit by sound management,
      because the worker was paid by the hour.
o    The worker operated within a team and was part and parcel of the end client's
      organisation, just like an employee.
o    Even if the contractor's company did have other sources of income outside of IR35,
      this did not preclude the engagement in question from being "caught".

Originally the Revenue said that due to the complexity of the subject matter, the appeals would have to be heard before the Special Commissioners. Qdos had to point out to the Revenue that in accordance with the legislation on tax appeals, it was up to the appellant to opt for either the General Commissioners or the Special Commissioners, and if he opted for the former, only the General Commissioners could decide whether the appeals should be referred to the Specials. Qdos then made a submission to the contractor's local General Commissioners, stating that it would be easier and less costly for the appellant if the appeals were heard locally, and if ordinary taxpayers were expected to decide their own tax status, and that of those they engage, then there was no logic in presuming that the General Commissioners were incapable of making such decisions.

Following a two-year enquiry, the appeals were listed for hearing before the General Commissioners in May 2005. However, unbeknown to the contractor and his advisers, the Revenue continued their enquiries in secret, and shortly before the scheduled hearing suddenly produced some new documents that had lately been obtained from the end client. Qdos immediately requested an adjournment of the hearing, to enable the new evidence to be properly considered.

The contractor then heard through the grapevine that personal interviews had taken place between Revenue staff and representatives of the end client, details of which had not been disclosed. Qdos complained to the Revenue and subsequently obtained copies of the Inspector's detailed notes of interview. The Revenue denied that they had been withholding this information - they had just not bothered to tell anyone about it.

The next move was made by the Revenue, in transferring the case from the local office to the Regional Appeals Unit, headed by a specialist advocate whose only function is to conduct contentious appeal cases on the Revenue's behalf. This led to a further delay in proceedings, and the appeals were eventually heard in March 2006.

Qdos were unhappy at the proposed location of the hearing, a Magistrates Court, because this sort of formal setting can be very daunting for the appellant, and is not really appropriate for civil proceedings. Notwithstanding, the contractor was anxious for some resolution to the enquiry, so no objection was raised.

In Court, the contractor was naturally nervous and under cross-examination had to withstand repeated questions from the Revenue's advocate about discrepancies between his witness statement and a version of events given by a representative of the end client. The Revenue's advocate put it to the contractor that he had exaggerated the features of his working arrangements that had characteristics of self-employment, that the supposed right of substitution was "illusory", and that in reality the end client was able to control him in much the same way as if he had been their employee. He put it to the contractor that he was a Project Manager and was thus in control of the end client's staff, so it was not credible that the end client would have relinquished any rights of control over him.

At the end of the day, the Commissioners decided to reserve judgement, and it was a fortnight later before their decision was published. The Commissioners had clearly given careful consideration to both the documentary evidence and the witness testimony, and their judgement was detailed and compelling. They felt that a written right of substitution could not be displaced by the fact that it had not been exercised in practice. On the subject of integration into the end client's organisation, the Commissioners pointed out that independence and isolation were not the same thing. The worker's position as part of a team did not affect the independence of his status. Moreover, he may have been a Project Manager, but he was not a line manager.

This success vindicates Qdos Consulting's long-term policy of avoiding hearings before the Special Commissioners, which run the risk of setting damaging legal precedents, to say nothing of the trouble and expense for all concerned. Preferably appeals should be determined by agreement, by means of evidence and argument. However, if the other side will not agree, the local General Commissioners provide a valuable service that is readily accessible to all, with no more fuss than is absolutely necessary to preserve the legal proprieties.

Keith Preece - Qdos Consulting Ltd

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Qdos Freelance Tax Protection gives you total fee protection affording you peace of mind in the event of a PAYE compliance vist, IR35 dispute or Tax Return Enquiry, as your case will be handled by one of our team of tax specialists at Qdos from PAYE compliance review by the Inland Revenue through to Commissioners' Hearing, if required.

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Posted 05/04/06

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