IT contractors RALC Consulting Limited have successfully appealed their IR35 case (RALC Consulting v HMRC (2019) TC7474) at First Tier Tribunal, following an epic five year battle involving a veritable army of HMRC legal representatives. The director, Richard Alcock, won his case against HMRC’s lawyers on the grounds that there was no mutuality of obligation, and no real control by the client.
The appeal was raised against a tax demand issued by HMRC, whose assertion was that IR35 should have been applied to multiple engagements between 2010 and 2015.
From 2010, Mr Alcock entered into a series of contracts with a former employer, Accenture, and also DWP, a client of Accenture, whose projects he had previously worked on. Even though Mr Alcock had previously had a direct employment with his clients, he maintained that he had genuine commercial reasons for entering the contracting market. It meant, he explained, that he could choose which clients to work with, and could fully focus on enabling the clients’ programmes.
In spite of what to most would appear to be a reasonable explanation, it was this employment history which drew HMRC’s attention, and it was a central focus in the argument put forward by HMRC. They argued that his engagements implied an expectation of continued work. However, this was dismissed by Tribunal Judge Rupert Jones, who noted: “The Tribunal does not accept HMRC’s submission that the long history of Mr Alcock’s previous engagement and operation of this contract in practice led to an expectation that Mr Alcock would be provided with work every business day during the course of an assignment, unless agreed otherwise, such that it crystallised into a legal obligation.”
This determination was reached, not only on the contractual terms, but also on the working practice, the judge noting that in one of the Accenture contracts, the programme was stopped, resulting in RALC’s contract being terminated early in January 2013. This meant that RALC was not paid for 10 days work.
Turning to substitution, although a substitute was never provided, Mr Alcock was able to demonstrate how he had once arranged for a sub-contractor, only for the proposed contractor to accept another offer elsewhere. The tribunal ultimately accepted that Mr Alcock’s engagements permitted him to provide a substitute, albeit a fettered one, because his clients were required to approve the selected worker.
Ultimately, the conclusiveness with which the case was decided will doubtless raise even more questions over HMRC’s judgement in spending taxpayers’ money defending a case in which they never really looked like succeeding.
The outcome of the case rested largely on Mutuality of Obligation, with the tribunal accepting the submission put forward by Mr Alcock’s team. This was published (Paragraph 451) in the decision, and reads:
“There is a very clear distinction here. And Mr Alcock is clearly self-employed, because he fits the latter sequence of events. He agreed the work to be done, and only that work to be done. Then he got to work, and worked very hard indeed to meet the outcome goals. And then he billed only for the work done. His contract specifically states that he can only charge for work actually completed. And to top it off, in one instance they did cut the project short at a moment’s notice, and he was not paid.
“There is no question at all that he could charge just for making himself available, and neither was the client obliged to give him work or allocate work – the work has already been agreed upfront.
“So, since there was no minimum obligation to provide work and no ability to charge for just making himself available, it is clear that the key elements of mutuality, in the work/wage bargain sense, are missing, and therefore he cannot be considered an employee.”
HMRC, not for the first time, failed to convince the tribunal into accepting its interpretation of Mutuality of Obligation. They contested that the exchange of labour for remuneration was evidence of Mutuality of Obligation, and therefore was indicative of employment. However, this was rejected by Judge Jones, who observed:
“Although there was some mutuality of obligations in respect of the requirement for payment if work was done, it did not extend beyond the irreducible minimum in any contract to provide services nor demonstrate the relationship was one of a contract of service.”
The element of control in relation to the engagements was also decided in RALC’s favour, when the tribunal concluded that the ‘how’ or ‘what’ of the work “wasn’t subject to sufficient control”.
Judge Jones confirmed that Mr Alcock’s work was project-based, stating: “The Tribunal has found that Mr Alcock’s assignments were to deliver pieces of work rather than simply to occupy the specified role so that it was the performance and delivery that controlled the nature of his work rather than the job title.”
Although Judge Jones acknowledged that there was a degree of control over “when and where” Mr Alcock provided his services, he went on to note “this was necessary to provide a quality of service for his clients”, adding: “Mr Alcock’s substantial level of control over how he provided his services was provided for as a matter of right in his contracts and exercised in practice.”
The tribunal ruling should be seen as extremely significant for the contracting sector. With the new private sector rules approaching, many firms are indicating that they will not engage limited company contractors. However this case illustrates how ‘outside IR35’ compliance can be achieved. The results of this case should serve as a blueprint for other contractual engagements, maintains IR35 expert Dave Chaplin of ContractorCalculator.