Contractor John Spencer says key facts were overlooked in the JLJ Services tribunal ruling. This found him inside IR35 for four of the seven years under investigation by HMRC; a finding that he believes did not go far enough, although it will substantially reduce his £141,000 tax bill.
Spencer is scathing of the system, saying in this exclusive interview with ContractorCalculator that, “There is too much weight on opinion and not enough on facts, many of which were dismissed arbitrarily or simply ignored in this ruling. I supplied information about my working patterns and contracts that did not feature at all in the ruling. There will be no appeal because I plan on finally retiring; but I do want to set the record straight.”
Spencer says he supplied HMRC with detailed timesheets demonstrating that his working patterns bore no resemblance to those of an employee, and handed over a contract log that showed that his final year with client Allianz featured several contracts on different projects. However, tribunal Judge Howard Nolan deemed these contracts outside of IR35 in the body text but did not exclude them in his summary.
War of words with HMRC, as tax liabilities mounted
According to Spencer, in August 2004 HMRC requested an interview to discuss an employer’s compliance review it was undertaking of JLJ Services, Spencer’s contractor limited company. Because he was moving house at the time, the meeting did not take place until July 2006, which was when Spencer had his first inkling that there was more to HMRC’s interest than he realised.
There is too much weight on opinion and not enough on facts, many of which were dismissed arbitrarily or simply ignored in this ruling
“I met with two inspectors who asked a great many questions about my contracts, projects and extensions, and then asked to see the contracts,” explains Spencer. “I forwarded copies, and then heard nothing for some months.”
So he was shocked to receive a letter from HMRC stating that it believed his contracts to be inside IR35, and listing 21 reasons why the inspectors had came to this conclusion. “I responded detailing why I felt HMRC was wrong in coming to the conclusions it did,” he continues. “This exchange of letters continued and I would periodically receive a tax demand. One letter informed me that my tax bill was increasing by £24.36 for each day I failed to pay in full.”
It was during this exchange that Spencer supplied HMRC with an hour-by-hour breakdown of his working patterns based on the detailed timesheets he maintained for billing his client. “The working patterns clearly did not match those of an employee, but HMRC refused to acknowledge the facts,” he adds.
Inaccurate witness statements
In 2007, HMRC escalated its investigation by asking Spencer to supply the contact details of his clients. “I gave the contact details of a senior manager with whom I’d worked for several years, as well as those of my project manager at that time, whom I had only known for a few months. HMRC sent a list of questions, to which they responded; then two inspectors turned up to conduct interviews with them.”
HMRC sent Spencer the results: “My client’s responses were factually incorrect in many cases, but not too unhelpful. I responded to HMRC, pointing this out. HMRC in turn went back to the client, who agreed that there were inaccuracies.” For example, he points out that the client’s assertion that it would take a substitute contractor three weeks to “be of any use” was simply incorrect.
Spencer was still contracting at Allianz during this period, but the nature of his contracting had changed. Instead of a contract renewal, he had won a new three-month contract with a different department within the business, which was followed by another three-month contract to complete an element of the project he’d been working on previously, and then two further one month contracts for to conduct feasibilities studies on new equipment.
Individual projects within a major programme
“At the start of the contract with Allianz, I had had my contract checked by my accountant ClearSky and it was given the all clear,” says Spencer. “This was the period that the ruling concluded did not fall inside IR35.”
In fact, Spencer contends that he continued to work on a discrete major network migration programme all along, which was expected to take several years and had multiple projects associated to which he contributed.
“I don’t think we saw the significance of these projects originally,” admits Spencer, “which is why immediately after the hearing I handed Judge Nolan and HMRC a spreadsheet printout detailing contracts and projects over my entire contracting career.
“The ruling referred to periods between contracts in the nineties, referred to as periods of ‘unemployment’, which could only have been determined from that spreadsheet printout I supplied. But it failed to acknowledge the ongoing project breakdown and discrete contracts during the period I was found to be inside of IR35.”
IR35 case strategies have changed
Spencer feels that the sand has shifted in status cases and that tribunals no longer place as much emphasis on points of law and the core tests of employment: substitution, control and mutuality of obligation.
“Had we understood the significance of the detailed project descriptions and the importance of challenging the client’s evidence so that their opinions were not simply accepted as facts, these strategies would have featured more strongly in the case for my defence.”
These are lessons Spencer urges contractors facing IR35 investigations to take on board: “Avoid long contracts unless they are for a very specific, long-term project and do everything possible to avoid looking like an employee.”