Partner Emma Andrews looks at how confusing IR35 rulings can be.
HMRC recently lost an appeal by a construction contractor in an IR35 ruling. The ruling in MDMC (Mark Daniels) Ltd v HMRC, whilst in favour of the taxpayer, shows just how confusing IR35 cases are. It highlights that each case MUST be considered in its own right, applying the circumstances of each service contract to HMRC’s guidelines.
What is IR35 tax legislation?
IR35 tax avoidance legislation was introduced by the labour Government in 1999. The purpose of the legislation was to combat tax avoidance from ‘disguised employment’, where workers had an employee-type relationship but were receiving payments via an intermediary, such as their own limited company.
When IR35 applies, the intermediary is required to deduct PAYE and National Insurance from the income received, if it has not been mostly drawn as salary.
MDMC Ltd -v- HMRC ruling in greater detail
In MDMC Ltd v HMRC (2018), HMRC lost an appeal at First Tier Tribunal (FTT). HMRC had previously determined that MDMC’s contract providing services on large construction projects, should have been caught by IR35. However, MDMC successfully appealed.
Some of the factors that were considered in this case were:
- Financial risk– there was no financial risk to Mr Daniels, indicating employment
- Substitution– no substitution was permitted, indicating employment
- Control- Mr Daniels was not controlled by the end user, indicating self-employment
However, most surprisingly, the FTT considered the point that Mr Daniels received no sick pay, holiday pay or employment benefits in their decision, which concluded that these factors contributed to self-employment being more relevant than an employment contract.
What this ruling means?
This ruling is good news for the contractor however, it demonstrates how complex the rules are. With HMRC looking to extend IR35 changes made last year in the public sector to the private sector, the uncertainty as to what is classed as employment versus self-employment is likely to be greater than ever.
For more information, the HMRC employment status tool can be found here.
Or, please contact us if you would like us to check your Employment Status or talk to us about the tax implications of IR35.