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BREAKING: Tribunal sends IR35 case back to square one after 10 years

The Upper-tier tax tribunal (UT) has allowed an appeal by HMRC against a First-tier Tribunal (FTT) decision five years ago in favour of RALC Consulting Ltd. However, whilst the judges identified errors in law, they did not decide against the taxpayer, and instead, "with some reluctance", remitted the case for a fresh FTT hearing to examine the facts pertaining to engagements which took place 14 years ago.

With RALC Consulting likely to now become insolvent, having not traded for five years, it is currently unknown whether the IR35 status in the case is likely ever to be resolved.

RALC is not alone - of the last seven IR35 cases successfully appealed by the taxpayer at the First-tier tax tribunal, HMRC has accused the judges in all but one of making errors in law.

Dave Chaplin, CEO of IR35 Shield, who assisted with the case five years ago and who attended the UT hearing at the High Court, says: "When considering all the evidence in the case, including the tribunal transcript of the 8-hour cross-examination of Richard Alcock by HMRC, the recording and transcript of the telephone conversation with the DWP managers, and witness statements of seven people, it's frustrating that the UT were unable to remake the decision. Returning to the FTT for a fresh hearing is not a tenable option for RALC, so the outcome, in this case, may remain forever unresolved."

Richard Alcock, director of RALC Consulting, speaking exclusively with ContractorCalculator, says: "HMRC have effectively won by default because they scrapped their way back to First-tier on a technicality and have ground me down to the point where it's unaffordable to continue.

"My company now looks like it will become insolvent, making it impossible to secure equivalent representation at an FTT for another hearing, let alone trying to locate witnesses for events that happened 14 years ago. RALC was flourishing and later expanded and hired employees, but ceased trading due to the toll of this decade long IR35 issue. If IR35 had not got in the way, I have every confidence I would now be leading a successful company. There do not appear to be any winners here."

Background to RALC Consulting

RALC Consulting Ltd had successfully appealed against HMRC's determinations to apply IR35 rules to his engagements with Accenture and the Department for Work and Pensions (DWP) between 2010 and 2015. The FTT ruled in November 2019 that the engagements between Mr Alcock and his end clients would be contracts for services, falling outside the scope of IR35. The tribunal initially shared a draft ruling with the parties on 24 October 2019, and 5 days later, the FTT received unsolicited submissions from HMRC regarding the relevance and impact of the Christa Ackroyd ruling on the present case. The tribunal released an amended decision ("Decision") to the parties on 03 March 2019.

The FTT's Decision was based on several factors, including the lack of mutuality of obligation, the level of control exercised by the end clients, and Mr Alcock being in business on his own account.

Relative strength of evidence

At the original FTT, HMRC's case relied heavily on the contents of an HMRC-written note from a brief teleconference with a former deputy director at DWP, to whom Richard Alcock briefly reported during one of his contracts. Despite being asked three times, the deputy director never signed off on the notes, and the lack of a verbatim transcript further weakened the evidence. The Tribunal Judge noted that the evidence was hearsay "filtered through the medium of an HMRC note taker." In contrast, Team RALC presented witness statements from seven individuals, including representatives from Accenture and DWP, with witnesses attending court and recording a DWP teleconference, in addition to Richard Alcock's eight-hour cross-examination.

The FTT also heard evidence from Accenture that RALC had the right to engage a subcontractor to turn a margin and a detailed May 2016 letter from Accenture that did not suit HMRC because it confirmed and explained the lack of extent of control and other relevant matters.

HMRC appeared to ignore evidence that did not align with its agenda, including the results of its own Check Employment Status for Tax (CEST) tool, which had determined an 'outside IR35' status for Richard Alcock based on the information provided. The taxman's legal counsel even attempted to have the CEST analysis evidence omitted from consideration during a preliminary tribunal hearing, describing the tool as "irrelevant". The selective approach to evidence by HMRC stood in stark contrast to the comprehensive and compelling case presented by Team RALC.

Grounds of Appeal

Dissatisfied with the FTT's ruling, HMRC appealed to the UT on seven grounds. These grounds included the FTT's alleged failure to determine the terms of the hypothetical contracts properly, errors in the application of the mutuality of obligation test, and the consideration of irrelevant factors in assessing control and whether Mr Alcock was in business on his own account.

The parties agreed to stay the appeal pending the judgments of the Court of Appeal in PGMOL v HMRC [2021] EWCA Civ 1370.

The UT hearing in December 2023 focused primarily on the first two grounds of appeal.

Ground 1 – hypothetical contracts

HMRC claimed that the FTT identified sets of terms for the hypothetical contracts between Mr Alcock and his end clients (FTT [485]) but did so at the end of its Decision only after having applied the common law test for employment status to the terms of the actual contracts themselves, instead of as required by section 49(1)(c) ITEPA and the relevant case law, construct hypothetical contracts and then apply the common law test to the terms of those hypothetical contracts.

As the judge pointed out [30(1)], "Mr Stone [counsel for HMRC] says the FTT did not properly engage in the tasks required of it by the guidance in case law (principally HMRC v Atholl House Productions Ltd [2021] UKUT 37 ("Atholl House UT", which was not available to the FTT when it made its Decision).

Micheal Paulin of One Crown Office Row, Counsel for RALC Consulting, submitted that there was no material error in the FTT's approach and made three main points:

  1. HMRC's submissions did not properly reflect the FTT's approach - the Decision was consistent with the three-stage approach set out by the Court of Appeal at Atholl House CA [7].
  2. The process in Atholl House CA [7] is simply a "helpful structure", and even if there was departure at some point, the FTT completed the exercise of addressing the issues required.
  3. The challenges raised by HMRC are challenges to evaluative judgments made by the FTT, and there is limited scope to interfere with an evaluative decision.

Whilst the UT stated that the way in which the FTT chose to order the Decision did not itself demonstrate an error of law, they did conclude that the FTT failed to follow its own self-direction by not properly constructing hypothetical contracts for each engagement and then applying the employment status test to those terms.

Ground 2 – mutuality of obligation

HMRC argued two points: Firstly, in interpreting the actual written contracts as containing no obligation upon the end clients to offer work to Mr Alcock or for Mr Alcock to accept the work offered, the FTT failed to interpret the contracts in the context of their commercial reality. Secondly, HMRC argued that the FTT applied a concept of mutuality of obligation that was contrary to the principles established in the case law authority of the Court of Appeal decision in HMRC v Professional Game Match Officials Limited [2021] EWCA Civ 1370 ("PGMOL") – a case decision published two years after the FTT first heard RALC.

The UT judges relied on PGMOL, stating in 73(2) that "An individual engagement can involve mutuality of obligation if work which has been offered is in fact done for payment – and may give rise to a contract of employment if the other elements of the test are met (PGMOL [118(3)])."

The UT concluded that the FTT had "betrayed the law" concerning mutuality of obligation. The UT stated that the FTT had erroneously made mutuality of obligation determinative and regarded certain factors, such as the lack of an obligation to provide further work and the right to terminate the arrangement at will, as inconsistent with mutuality of obligation.

Chaplin says: "It somewhat frustrating that in both grounds of appeal, HMRC relied on case law authorities that happened years after the original FTT decision. Mutuality remains a contentious area of case law regarding which components of mutuality are relevant and where they fit into the Ready Mixed Concrete status framework. Tax experts and HMRC are all waiting for a Supreme Court decision to resolve the matter. We know from Atholl House that mutuality isn't solely determinative, and every status evaluation should be multi-factorial."

No decision - remittal to the FTT

The judges concluded that there were material errors of law in the original FTT decision, which were material, and therefore set aside the Decision.

After considering whether to remake the Decision or remit the appeal back to the FTT, they decided to remit, despite doing so "with some reluctance" whilst acknowledging the difficulties this will cause for the parties, particularly for Mr Alcock.

The judges also explicitly stated that "the FTT should not infer from our decision that we are of the view that, if the FTT had approached the construction of the hypothetical contracts correctly and had properly applied the concepts of mutuality of obligation, it would have reached the conclusion that Mr Alcock should be regarded as an employee of the end clients for income tax purposes."

The UT also stressed that a future FTT hearing should have regard to the approach endorsed by the Court of Appeal in the recent Atholl House and Kickabout decisions published on 22 April 2022.

What happens next?

The financial consequences of this HMRC IR35 intervention have been profound, leading to the cessation of trading by RALC Consulting Limited years ago, which remained in legal limbo for years. The significant toll on RALC Consulting means it lacks the necessary funds to continue its legal representation.

The critique of the FTT Decision by the UT, describing it as a betrayal of law, is deeply concerning, particularly considering RALC's insolvency and inability to bear further costs.

For HMRC, the UT appeal is a pyrrhic victory. HMRC has also incurred significant costs in exercising its right of appeal from the First-tier Tribunal to the Upper Tribunal, resulting in the remittal back to the FTT.

Unlike HMRC, RALC does not have the luxury of unlimited access to the public purse to defend itself indefinitely. Another trip to the tax tribunal is out of financial reach, and the final outcome may remain forever unknown.

Chaplin says: "Given the gravity of the UT's criticism of the FTT's Decision and its flawed nature, a comprehensive understanding of the witness evidence and cross-examination heard by the FTT during the original hearing is paramount. When the FTT considers the UT's directions upon remittal, it must ensure adherence to the overriding objective of achieving a just and fair outcome for both parties."

What can we all learn?

The protracted nature of the RALC Consulting case, spanning over a decade and multiple levels of the judiciary, underscores the challenges taxpayers and HMRC face in navigating the complex landscape of tax status cases.

The UT appeal, heard in December 2023, concerned engagements from as far back as the 2010/11 tax year, highlighting the long-term impact of these disputes on all parties involved.

In the context of the IR35 Reforms introduced in the public sector in 2017 and the private sector in 2021, Chaplin says: "The RALC case exemplifies the unintended consequences of the IR35 reforms, which have placed a heavy burden on genuine businesses and undermined the entrepreneurial spirit that drives economic growth.

"The RALC Consulting case is a stark reminder of the urgent need for greater clarity and fairness in applying IR35 rules. Until these issues are addressed, the growth and competitiveness of UK businesses will continue to be hindered by the uncertainties surrounding the IR35 and off-payroll legislation."

Published: Monday, 15 April 2024

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