Taxman wins right to block IR35 victory - Februrary 2009

It's the stuff of IT contractors' nightmares: to hear from a judge that you're not an employee and owe nothing under IR35 only to then be told, 'Sorry, we got some of it wrong.'

Fortunately, such verdicts are rare, but not rare enough for Alan Brill, sole director of IT contractor firm Larkstar Data Ltd, whose triumphant IR35 appeal was ordered to be re-heard.

Advisers initially applauded Brill last January when, without representation, he single-handedly proved he was in business of his own account, from 2001 to April 2003.

The General Commissioners' ruling rejected HMRC's claim that his arrangement to supply IT services, via a recruiter, to Matra Bae Dynamics was caught by IR35.

But those same advisers said Brill took a risk in deciding that the Generals, a lay tribunal, should rule on his case instead of the Specials, who are professionally qualified.

Egos said: "Whilst it may be going a bit far to suggest that the tribunal might not have even heard of IR35 before, it might be unfair to expect a lay tribunal to have had sufficient familiarity with the complex and subtle legal issues arising in such a case.

"IR35…requires a significant degree of expertise and experience to be able to come to a conclusion that is accurate and at least reasonably legally defensible."

For an IR35 ruling to be reliable, the worker's status must be determined by assessing the contract's terms and conditions before applying case law precedent to those assessments.

This task, it seems, was too great an ask for the Generals and, seeming to know this, HMRC took the unusual step of appealing the tribunal's ruling in favour of Brill to the High Court.

No written judgement was published by the court, but a just-released transcript (PDF) of Sir Donald Rattee's comments confirms that the Generals "misdirected themselves in law," as HMRC thought.

The transcript, which fails to mention Brill's employment status, says the Generals neglected to consider authorities HMRC referred them to, and so did not take all arguments into account.

IR35 adviser Kate Cottrell reflected: "Unfortunately [for Brill] it appears that the General Commissioners did not consider the case law at all; hence they had misdirected themselves".

Sir Donald upheld only one of the Revenue's four grounds for appeal, concerning control and mutuality of obligation, but this was enough to ensure that the case had to be re-heard.

So, despite already being found wanting in their approach, process and reasoning to Brill's true employment status, the case will now return to the Generals, albeit a different panel.

The PCG, which funded the taxpayer's defence, said: "This case illustrates why our advisers have historically always taken cases to the Special Commissioners rather than the Generals".

It also stresses the importance of having "expert advice from the earliest stage", added PCG's managing director John Brazier, who said the Generals were more prone to ruling in error.

Asked if Brill, who must face the GCs all over again, made his own errors, the PCG said: "The only mistake, arguably, was going to the General rather than the Special Commissioners."

Posed the same question, another IT contractor advisor was less sympathetic: "He's potentially going to pay for his own mistake of choosing the wrong legal forum."

All of the IR35 experts dismissed claims that Larkstar's case, so far, has wider implications for IT contractors, such as having their IR35 'victories' challenged in the High Court.

"There's certainly no evidence that HMRC have suddenly found a way of enforcing IR35 effectively - it is, was and will remain impossible, owing to the catastrophically bad design of the law," said the PCG's John Kell.

"[Also] appeals are time-limited, so HMRC's window to appeal is restricted to a few months, and they can only do it if there was something wrong with the Commissioners' ruling to start off with".

He explained that the PCG would not be issuing any new guidance to contractors based on the case so far, as "the key status indicators" of IR35 remain "the same as they ever were."

"You should maintain a record of how your contractual relationships stay on the right side of them," the group recommended, "both in terms of the contract and your day-to-day interaction with the client."

In line with advice from Bauer & Cottrell, Mr Kell said contractors who were unlucky enough to be picked by HMRC for an IR35 investigation should seek professional guidance "immediately."

The firm warned: "With HMRC’s new penalty regime beginning in April where it is necessary to demonstrate 'reasonable care'…everyone will [hopefully] take some action.

"[This action should seek to] establish their IR35 positions with a review of the working practices and the contracts to ensure that they never find themselves in the same position as Alan Brill."

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