IR35 IRL: How much will getting caught cost you?
There was a time when IR35 was something of a bogeyman to contractors. Tall tales and horror stories. Lurking in the shadows. A looming spectre, but never quite tangible enough to make you feel its presence. Those days are over. Gone are the 1 in 60,000 odds of being caught.
In the last 18 months or so HMRC has ramped up its campaign to catch contractors working as disguised employees and therefore inside IR35. Need more proof? We've rounded up a few of the more prominent cases below.
Christa Ackroyd and the BBC - £419,151
Part of the wider, and ongoing, BBC IR35 fiasco. Christa Ackroyd's case was based upon a contract agreed with the BBC in 2006, during which time she was working via her limited company on the BBC's Look North programme.
Ackroyd's IR35 status was determined on a number of factors outlined in this Contractor Calculator summary, most prominently:
- During cross-examination, Ackroyd accepted that the BBC ultimately had the right to specify what services CAM Ltd would provide
- The court determined that through the editor the BBC would have control over content, given its editorial responsibility
- Ackroyd's contract restricted her from providing services to other organisations in the UK without the consent of the BBC
She lost her appeal covering the tax years from 2006/07 to 2012/13, with HMRC stating that she owed income tax and NICs totalling £419,151.
ECR Consulting Limited - Undisclosed
It pays to take the time to go through any contract you have with a fine-toothed comb. The case of ECR Consulting proves as much. In this instance, the client had identified a clear need for outside help in completing a specific project and the contract allowed for the supplier (ECR Consulting) to make changes without prior notification very much suggesting that ECR had control.
Despite it also being evident that the engagement required the contractor's personal service due to the end client's organisation not having a worker with the specialist skills required, among a number of other factors which clearly pointed to the role being outside IR35, there was concern with a number of the contractual terms. You can read more on those here.
One key line in those contractual terms stood out that the project was to perform the duties of Executive Director of Resources as agreed between the Company and Client from time to time.
In HMRC's view this line provided evidence that the contractor was essentially an officeholder, and therefore inside IR35. Had the contract been reviewed prior to the work beginning, then the wording could have easily been amended to more accurately reflect the supplier's role as a trouble-shooter.
Despite attempts to rectify the matter later on nothing could be done and, rather than deal with the expense of taking the case to a tribunal, the contractor instead chose to accept HMRC's decision.
JLJ Services Ltd. - £141,000
Following a four-year battle with HMRC, John Spencer (operating as JLJ Services Ltd.) found himself with a bill for unpaid taxes, NICs, and penalties totalling £141,000. But what really startled observers was that previously significant factors that had been relied upon in numerous prior IR35 cases had little or no impact on the decision this time around.
Spencer's accountants deemed that his working practices fell outside of IR35 and that there were no issues with his work for the end client (Allianz). HMRC, however, disagreed and ruled that all the contracts between 2000 and 2007 were caught by IR35 and found Spencer liable. A later appeal accepted that IR35 did not apply for the first three years, until 2003, when Spencer became integrated into the client's business and regarded as an employee.
The problems highlighted by HMRC were numerous, ranging from the incorrect use of a Right of Substitution clause to a lack of control on projects to Spencer ultimately accepting yearly rolling contracts from Allianz. You can read more on the details over at Contractor Umbrella here.
Ultimately HMRC found that the intention of Allianz and Spencer for him not to considered an employee was reflected in the contract, but not in the arrangement itself. If you're working as a contractor for a client on a long-term basis, being fully aware of your working arrangements and your IR35 standing is imperative.
Failure to abide by the rules could result in a similarly lengthy legal battle and life-changing financial consequences.
We can help if you find yourself in a situation where you could be inside IR35. Want to know more? Get in touch with us on 01242 808740 to find out more.