Exclusive information from a source close to the recent first-tier IR35 tax tribunal involving contractor Mark Fitzpatrick of MBF Design Services raises a number of intriguing questions, including the possibility that IR35 might have raised considerably more than previous ‘best estimates’ suggest.
During the time Fitzpatrick was contracting at client Airbus, numerous contractors were found to be inside IR35, a source close to the case has revealed to ContractorCalculator. In fact, says the source, the defence and aerospace industry was a target-rich environment for HMRC, with large numbers of contractors found to be inside IR35.
So why didn’t Mark Fitzpartrick follow all those other contractors into the clutches of IR35, despite the taxman’s best efforts? An analysis of the tribunal’s ruling suggests that HMRC’s case was seriously weak from the start. That being so, why did tax inspectors pursue it so vigorously, all the way to a first-tier tax tribunal? At that tribunal, Fitzpatrick was exonerated of any liability under IR35, apparently because evidence from two key HMRC witnesses was excluded. Is MBF Design Services the one that got away?
Defence and aerospace – target rich-environments for HMRC
Creating teams of engineering contractors to focus on complex design projects in ‘hothouse’ conditions is common in the highly technical aerospace and defence sectors.
These teams of contractors are ‘bums on seats’ tasked with focusing on a succession of engineering design problems, as directed by client project managers, and over which many have limited or no control. Clearly, many fall into HMRC’s definition of ‘disguised employees’ who should be taxed as such.
In fact, this sector is such a target-rich environment for HMRC that inspectors have acquired the specialist skills to identify and target firms such as Airbus, who used hundreds of contractors who were inside IR35.
Indeed, ContractorCalculator has been told that many of Fitzpatrick’s contemporaries were found by HMRC to be inside IR35, or saw the writing on the wall and opted to put themselves ‘inside’ by paying tax and National Insurance Contributions (NICs) as required by the rules.
Were genuine contractors actually ‘hidden victims’ of IR35?
ContractorCalculator’s source has revealed that, in the early days, HMRC’s process was to invite contractors to submit their contracts for ‘an opinion’. Significantly, therefore, these cases were never recorded and categorised as ‘IR35’ investigations.
Furthermore, it was not possible to track those contractors who voluntarily adopted the requirements of the IR35 legislation because, ContractorCalculator has been told, all HMRC’s inspectors would see were the accounts of companies predominantly paying a sole director a high salary and low, or no, dividends.
There is every likelihood that thousands of contractors, including many in the aerospace and defence sectors, were caught by IR35, either involuntarily through Employer Compliance Reviews or voluntarily through fear, and never recorded in any way.
There is every likelihood that thousands of contractors, including many in the aerospace and defence sectors, were caught by IR35, either involuntarily through Employer Compliance Reviews or voluntarily through fear, and never recorded in any way
Not only would that mean there were a potentially huge numbers of ‘hidden victims’ of IR35, but they would also have represented significant sums of tax revenue, showing that IR35 may have been much more successful in revenue generation for the Exchequer than was previously thought.
What was in the evidence disallowed in the MBF Design Services case?
When Judge Cornwell-Kelly’s full ruling is subjected to analysis, it begs the question: why did HMRC pursue such a weak case against MBF Design Services in the first case?
Furthermore, if HMRC started out confident of victory, and the only evidence disallowed by the Judge were two witness statements by Airbus executives, one of whom was Fitzpatrick’s team leader, so presumably best qualified to describe his working arrangements, and the other a senior manager, what was it they were going to say? And why did HMRC not call both parties as witnesses?
Fitzpatrick’s company MBF Design Services has been completely exonerated and that should, rightly, be an end to the matter. But was Fitzpatrick just lucky when many of his contemporaries were not? Was MBF Design Services simply the one that got away? And did the way HMRC investigated cases lead to much larger IR35-related tax revenues than previously suspected?