An individual freelancer, representing himself against an Inland Revenue IR35 ruling, has successfully overturned the revenue ruling and is now seeking to recover the deemed PAYE and NIC from them.
This is a great story of success for the underdog but here at Freelance UK we must say that representing yourself in these situations is not always the best route to take - we would always recommend seeking professional advice when dealing with matters such as this.
Background
For the tax years 2000/2001 and 2001/2002 the freelancer, following advice from his former accountants, submitted his P35 and paid the PAYEE and NIC on the resulting deemed salary as he was told that IR35 applied to his contract. In 2002 the freelancer compared his position with other freelance workers who were contracted to the same client and decided he had made a mistake.
In July 2002 his accountants contacted the Revenue and asked for the case to be reviewed, in early 2003 the Revenue completed their review and issued a formal decision that IR35 applied. At this point the freelancer appealed and the case was scheduled to be heard before the Commissioners.
Revenue Mistakes?
A feature of the case that may have swung to the advantage of the freelancer was a series of mistakes, misinformation and what could almost be described as bullying by the Revenue.
Initially the Revenue dismissed one of his key witnesses as irrelevant, and only upon insistence by the freelancer did the Revenue interview him. During the hearing the Revenue suggested that the witness should leave once evidence had been given, leaving the freelancer to convince the Commissioners that the witness should remain so that he could help clarify any points raised by the revenue.
The Revenue also promised to provide the case law documentation two weeks before the hearing but only managed to produce the documents on the Friday before the case - after the freelancer had obtained his own copies. The Revenue also told him that all evidence and documentation had to be revealed to both sides at least seven days before the hearing - but according to the freelancer the Revenue produced several pieces of evidence that had not been previously shown to him on the day of the hearing.
The freelancer and his witness were surprised to find that the Revenue’s notes of their interview with the witness bore little resemblance to what they understood to have been said. The interview notes had not been agreed beforehand with the freelancer or his witness and they therefore had to dispute the accuracy of their contents during the hearing.
The freelancer’s stated “I was bullied and intimidated throughout the appeal process and during hearing day. I am absolutely disgusted by the way I was treated and do not trust the Revenue at all!”
In reaching their decision the Commissioners looked at classic status case law and the key status issues of Control, Financial Risk and Investment, Substitution, and Mutuality of Obligation.
Control
Despite the evidence of the contract itself the Commissioners accepted that the client’s control was “applied with a lighter touch”. The team leader confirmed that the freelancer’s situation differed from that of the client’s employees in a number of aspects.
- He had no arranged leave with the company
- He had no line manager, unlike the employee
- There was no strict control over how the freelancer delivered his projects, as the client was only interested in the end product
- Instead of formal reporting procedures progress was discussed informally – usually over a coffee
The Commissioners concluded that the control over the freelancer’s working arrangements “was less than was to be expected from an employer responsible in an employer/employee situation to an immediate superior”.
They also noted on issue of integration within the client that the freelancer had no sick pay arrangements, he was not on the internal telephone directory and his building pass was different from that of an employee.
Financial Risk and Investment
The Commissioners recorded the Revenue’s view that in this case the freelancers risk was little different from that of an employee who is paid in arrears. But the Commissioners noted that “the fact that his position differed from an ordinary employer/employee situation in that his company submitted an invoice and was dependant upon that invoice being met by (the client)”
The Commissioners also noted that while not obliged to provide equipment under the contract, the freelancer provided a laptop and mobile phone for use during the course of the contract.
Substitution
Although the contract showed that the freelancer was the person who was required to provide the services under the contract the Commissioners accepted the crucial evidence of the team leader that a substitute could have been sent and would have been accepted.
Mutuality
The Revenue raised the argument concerning the irreducible minimum of obligation necessary for a contract of service. The Commissioners accepted that most case law in the area revolved around workers who were trying to establish a minimum period of employment to qualify for employment rights and that the Courts were trying to establish whether there was a continuous contract or a series of contracts.
In this case the Commissioners considered that they could not ignore “the fact that there were a series of short term contracts governing particular projects which were renewed to coincide with the termination of one project and to cover a new and distinct project” and went on to say that it could not be assumed that “there would be an automatic renew of those contracts.”
In presenting his case the freelancer also drew the Commissioners’ attention to the LimeIT and Tilbury cases and the similarities with his case. As with LimeIT, the freelancer did not have the usual employee benefits such as holiday pay, sick pay, any bonus entitlement, pension rights or the same staff discounts on phones. As the Commissioner’s had already accepted the freelancer was not subject to the same supervision and control as an employee of the client and in practice he did not work the same hours as the client’s staff. In addition the freelancer pointed out that he paid for his own training and reference manuals.
Finally the Commissioners noted that on one occasion the freelancer’s contract with the client was terminated early when the work quoted for was no longer required.
Hence the Commissioners concluded that:
“the hypothetical contract construed in the manner required of them indicated to the Commissioners that (the freelancer’s) terms of work departed to such an extent from those of the normal employer/employee relationship as to show that he was in business on his own account and should not be treated as an employee under a contract of service ..”
Feb 26, 2004
Email this article
Printer friendly page
Previous Page
