IR35 - The Lottery (Part 1)
Workers 2 v HMRC 2
By Steve Gretton
"Extra Time Being Played" - Statements made in front of the Commissioners can seem
more persuasive than the actual contract, but how can the worker be expected to know
what will be said by the end-client at tribunal?
I write as a former Status Inspector who was deeply involved in the preparation of two of
the four recent IR 35 cases that have appeared before the Special Commissioners in recent
Having now left the ivory tower and working this side of the street, I hope that my insight
into the developments illustrated in these cases will help to show the way forward.
At first glance, results suggest that IR35 is still a lottery. There is still too much confusion
to be able to predict the outcome with certainty. Whilst HMRC will be congratulating
themselves over two victories, they will clearly be consoling themselves about the two they
believe got away, believing “but for the Commissioner's choice of who to believe” the
results could have been very different. However, that is a two edged sword as I hope to
What is frustrating about these four cases is that they are so similar. I’m sure you will
have read about these cases namely:
Datagate Services Ltd
Dragonfly Consulting Ltd
MKM Computing Ltd
First Word Software Ltd
There is very little to differentiate these cases from hundreds of typical arrangements that
I have seen over the years. The conditions for the workers are similar; and there are only
minor variations in the terms of the written contracts.
What is most noticeable is that HMRC won two cases because the Special Commissioners
heard evidence from the end-client which they found convincing. They took less notice of
either what the worker said or what was in the written contracts and more notice of what
the end-client's representatives said in oral evidence. By contrast, in the two cases that
the PSCs won, the evidence from the end-client was given less value for reasons we shall
This has caused a strong reaction and it has set the alarm bells ringing because contracts
which say all the right things can so easily be set aside depending on what the
Commissioners decide is the relevant evidence. This is what makes IR35 such a lottery.
How can the worker be expected to know what will be said by the end-client at tribunal?
As the final decision hinges on this information and it is not available at the outset, how
can the worker make a rational decision about the IR35 position?
The situation is made worse because of the time it has taken to bring these investigations
to conclusion. The process for bringing these cases to tribunal is too slow for legislation
with such a high public profile. At least one of these cases was submitted for hearing in
August 2005. For all concerned, and especially the PSC, it is sad that these cases were not
progressed with more urgency.
What emerges from these four cases is that HMRC has “got smart” in obtaining robust
evidence from the end-client. In the two cases HMRC won, statements made by the end-
client swayed the Commissioners. Looking at Dragonfly in more detail, it clear that the
lower level contract (agency / PSC) contained a substitution clause. It was not a 'send who
you like' clause, but nevertheless gave the worker some confidence. However, one end-
client manager said he 'would not be happy' for that to happen. Another manager was
recorded as having 'an absolute right' to refuse a substitute. (Incidentally the latter
statement was given by the worker himself to HMRC! This illustrates graphically the
imperative for workers to have good representation when being interrogated by HMRC! In
evidence, the manager did not go so far as to say that, but did not deny it either.)
However the Commissioners’ conclusion was that the end-client “did not want just any
competent tester, it wanted Mr Bessell.” If there is a requirement for personal service then
no number of substitution clauses in the lower level contract will change that requirement.
In fact, if the end-client is so sure, one is left wondering how anyone could imagine that
substitution is a realistic option. This is certainly something that workers need to ascertain
at the outset from the end-client if they want clarification of their IR35 position. (this will
be covered in more depth in my next article).
It could be said that HMRC had some luck. Despite the delays, the relevant witnesses they
needed were still in place. However the longer the review drags on, the harder it is for
them to find managers who are still in post, who remember the workers, or indeed what
projects and conditions they worked under!
With this in mind, for future cases, a carefully planned approach to this thorny subject
could pay dividends!
Examining the two cases HMRC lost. In First Word Software, the Commissioner rejected
the evidence from the end-client because one manager knew neither the details of the
higher level contract nor the specific work done by the worker; and the other was not able
to give direct evidence of events for the relevant period. By contrast, the worker himself
was found to be a credible witness, and the Commissioner preferred his evidence as he
spoke from personal experience.
In Datagate, a similar situation occurred. HMRC called a former senior HR manager, but
she was perceived as talking in generalities. Would Charles Hillier (the Commissioner
making judgment on Dragonfly and MKM) have been so dismissive? A second manager
was indisposed on the day of the hearing and his written statement was hardly
acknowledged. Things could have worked out differently so easily. However the flip-side is
that the worker himself was well prepared, understood the issues and his version of the
arrangements won the day for him.
The way ahead is to ensure that the workers understand the issues and is able to provide
evidence of personal experience, supported by direct evidence of events. This will result in
them being viewed as a credible witness.
The judgments given by Charles Hillier will inevitably be quoted by HMRC. His construction
of the notional contract is impressive, even if you don't agree with his conclusion! I would
commend the attempt to build the notional contract as something that everyone needs to
focus on in all cases.
All four cases further illustrate the problems facing anyone wanting a definite answer to
IR35. Evidence comes from four sources:
1. Higher level contract
2. Lower level contract
3. Worker's version of arrangements
4. End-client's version
These will not necessarily be in agreement. Who is telling the truth? What is the truth
anyway when it is a matter of judgment and opinion?
Looking at your client's contracts, has the agency overstated the substitution position and
understated the control that could be exerted by the end-client? Has the worker, being
aware of how much is at stake, been tempted to put too much spin on his version of
affairs? Do workers perceive themselves as experts, in business in their own right,
whereas the end-client may see them (as was inelegantly, but graphically phrased to me
by one end-client in the aerospace sector) 'Just bums in seats.” If HMRC have a witness
who has this attitude to the workers, then it makes it difficult for the workers to
demonstrate their business identity and integrity.
Part II of this article: A strategic approach to IR35 follows in a fortnight.
Steve Gretton now heads up employment status and IR35 services for Inspired
Employer Solutions Limited which specialises in providing planning, advisory and
support services in PAYE, NI, employment benefits, expenses, status cases, IR35,
investigations and the Construction Industry Scheme." He can be contacted on 01793
611173 or email@example.com