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As advised in a professional tax publication released today:
IT contractor Elaine Richardson, trading as ECR Consulting, won a case in May that could have cost her £50,000 (ECR Consulting v HMRC TCO1174). The victory underscored the importance of three tests for distinguishing between contractors and full-time employees.

IT contractor Richardson picked up work through a number of agencies, but HMRC’s case focused on two particular agencies that provided billing software to power companies. HMRC argued that the amount of work she undertook for one agency was enough to make her an employee, and that she should be taxed as one.

However, she was able to successfully challenge the HMRC decision by showing that she met three tests for working as a contractor.

The first test was a “substitution clause” – the agency supplying her work to the power company could easily have supplied other IT contractors during the project. The power company just wanted IT expertise, regardless of whether it was one person working on the project or different people.

The people who were asking Richardson to do the work were simply asking for the agency to provide someone who understood the software systems and was able to do the work. They weren’t bothered about who turned up. They hadn’t really noticed it was the same person who turned up… as long as the person could do the work. Of course this might not necessarily apply to all contractors, whose specialised expertise is often especially needed, but this points to the importance of being able to substitute services.

The second test concerned the “contract relationship”. The client used Richardson as a freelancer because there were times when it needed someone to do the work, but there were other times when no work needed. The end user was keen to keep [Richardson] at a distance and not keep her as an employee. Presumably this case focused on a period in time when there was an abundance of contracts around, which could be worked ad hoc, or even simultaneously. It’s fair to say that in today’s market such flexibility might be difficult to achieve.

The third test related to a change in fees. Richardson initially charged a £600 day for her software billing work when the IT contractor market was booming, but sharply reduced her day rate to £350 for later work in response to the economic downturn.
The court agreed that if someone was an employee they would not agree to such a sharp drop in earnings. In today’s climate this is probably another familiar tale, and worth bearing in mind that this can be used to your advantage in an IR35 dispute.