The much-anticipated Larkstar Data ruling is due imminently, and the contracting community is holding its breath, waiting for some much-needed good news. The case is unique, in that the contractor won at the General Commissioners, yet HMRC has taken the unprecedented step of lodging an appeal with the High Court.
When is a contractor’s victory not a victory?
Contractor Alan Brill and his wife, Jean, run Wales-based Larkstar Data. In the IR35 case before the General Commissioners in January 2008, the Brills successfully defended their family company, proving that they were in business on their own account and not employees.
This case is remarkable in several respects. First, the case was heard before the General Commissioners, who usually hear low-grade appeals against tax inspectors’ judgements. In addition, IR35 cases are generally thought to be too complex to be heard before the General Commissioners, and are usually heard before the Special Commissioners.
Because there are no public records published for cases before the General Commissioners, and only the parties involved receive copies of tribunal documents, little is known about the exact details of the case.
However, it is speculated that HMRC had a weak case, prompting it to go before the General Commissioners. Commenting on the initial victory for the Brills, John Kell of the Professional Contractors Group said: “For a contractor to succeed in navigating the complex waters of IR35 case law while defending themselves shows a great spirit of independence.”
Shock HMRC appeal
It was a spirit that HMRC seemed determined to crush, as the taxman immediately lodged an appeal against the decision with the High Court. This is thought to be heralding a new, tougher approach by the taxman, as such appeals are usually made by contractors against HMRC.
PCG supported the case at appeal in the High Court in November 2008. The ruling is expected imminently, but there is no indication of what the outcome will be, and just how concerned contractors should be.
For contractor to succeed in navigating the complex waters of IR35 case law while defending themselves shows a great spirit of independence
John Kell, PCG
In its recently updated Guide to IR35, PCG continues to emphasise that the ‘big three’ factors, right of substitution, control and mutuality of obligation, are key to determining a contractor’s IR35 status. And it is a subject strongly emphasised in the new Contractors’ Handbook, which shows that careful planning and knowing when to take professional advice is the way to enjoy a safe, profitable and secure contracting career.
New tax appeals process
The Larkstar Data ruling will come in just before a major modernisation of the tribunals system, which will see the abolition of the General Commissioners of Income Tax and their clerks and the creation of an all-new Tax Chamber.
On paper, the Tax Chamber looks set to level the playing field between contractors and HMRC, with new rights for contractors and the tribunal having powers to award costs against HMRC.
However, with a government desperate for new sources of tax revenue, but with a dwindling number of fresh targets, it is possible that HMRC is developing new ways of putting contractors firmly where they want them – within IR35.
Contractors taking a pounding
Contractors’ rights have taken a pounding in the last year, following High Court victories by HMRC over two landmark cases, The Alternative Book Company and Dragonfly Consulting.
Famed for the judge’s statement that the contractor Keith Shepherd’s substitution clause was ‘window dressing’, the ruling on The Alternative Book Company effectively rendered any contractor’s contract potentially useless in the face of a determined HMRC willing to prove the notional contract was one of employment.
The Dragonfly Consulting case had more sinister implications for contractors. Although yet to be put to the test, following the ruling against contractor Jonathan Bessell the case law effectively puts the decision as to whether a contractor is inside or outside of IR35 in the hands of HMRC.
Both cases also highlighted the need for contractors to take professional advice when drawing up contracts, and to guard jealously their contractor status ‘in the office’. In the same way that ‘if it looks like a duck and quacks like a duck, then it’s a duck’, with some justification the taxman has proved at the High Court that ‘if it looks like an employee and acts like an employee, then it’s an employee’.