COMPLIANCE
Blinded by the (northern) light
Justine Riccomini MSc FFTAAIPACharteredMCIPDChFCIPP, head of taxation for Institute of Chartered Accountants for Scotland explains the outcome from the upper tribunal (UT) in the latest in a series of IR35 cases
Background On 8 June 2021, the UT handed down its judgement in the case of Northern Light Solutions Ltd v Revenue and Customs Commissioners [2021] UKUT 134 (TCC). The case involved a contractor (Mr Lee) who provided his services to Nationwide Building Society through an intermediary company, Northern Light Solutions Ltd, over a seven-year period (2007 – 2014). HMRC challenged a series of contracts which were deemed to fall outside of IR35 between 2012 and 2015. The first-tier tribunal (FTT) found for HMRC, deciding that were it not for the presence of the intermediary, Mr Lee would have been an employee of the Nationwide, as determined by Section 49 Income Tax (Earnings and Pensions) Act 2003 Section 1(c). As both parties agreed that both Sections 49 (1)(a) and (b) were already in place in this case, the issue which the UT had to resolve was whether Section 49 (1) (c) applied – i.e: “The circumstances are such that— (i)if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of Key points: ● Her Majesty’s Revenue and Customs (HMRC) won this case against an information technology (IT) contractor who worked at Nationwide Building Society ● the key indicators of control, mutuality of obligation and substitution were examined ● the case shows that anyone advising on employment status and IR35/off- payroll working needs to understand the implications and refer to the Pimlico Plumbers case decision on substitution
especially in respect of the question of substitution. Nevertheless, as the judges considered that the additional scope of three of the appeal grounds presented no detriment to HMRC, these three grounds were admitted. The fourth appeal ground relating to the ‘part and parcel’ element was deemed to be too wide-ranging and contain irrelevancies and was refused. The outcomes at the UT in respect of each ground were as follows: 1. Control The FTT examined a typical project for Mr Lee to work on under his contract with Nationwide. Some key facts established were: ● Mr Lee worked several separate contracts, which were not carried over or ‘rolling’ from the last assignment. The FTT considered that each contract nevertheless represented a hypothetical contract of employment ● each project was overseen by a Nationwide governance board – but day- to-day tasks and project management, including estimating project outlays, were Mr Lee’s responsibility ● Mr Lee determined who would make up the project team for each assignment. The governance board could review Mr Lee’s plans and had an overarching power to adjust the plans, scope of the work, timing and cost where necessary ● the appellants claimed the FTT was wrong to have excluded the evidence which indicated Nationwide was not at liberty to move Mr Lee from one work project to another, and this pointed away from an employment contract. The UT judges disagreed ● the fact that Mr Lee was not the ultimate arbiter of where, when and how the work was carried out increased the case for him being under a hypothetical contract of
the client or the holder of an office under the client, or (ii)the worker is an office-holder who holds that office under the client and the services relate to the office.” To determine this, it was agreed that a similar approach should be adopted as took place in two other recent IR35 cases. This three-step approach was set out as follows by Herrington J and Brannan J in their decision: “1. Find the terms of the actual contractual arrangements… and relevant circumstances within which Mr Lee worked”. 2. Ascertain the terms of the ‘hypothetical contract’ (between Mr Lee and NBS) postulated by s 49(1)(c)(i) of ITEPA 2003 and the counterpart legislation as applicable for the purposes of National Insurance contributions (NICs)”. 3. Consider whether the hypothetical contract would be a contract of employment”. HMRC challenged a series of contracts which were deemed to fall outside of IR35 between 2012 and 2015. Four grounds for appeal? Although it was agreed to allow the appeal on four grounds in July 2020, there was controversy about how the four grounds were then framed by the appellants in their submission to the UT. The respondents argued that the grounds for appeal had been set out wider than they were permitted to be by the appellant,
| Professional in Payroll, Pensions and Reward | November 2021 | Issue 75 22
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