IT contractor wins quarter of a million pounds tax claim against HMRC

An IT contractor’s company won its challenge against HMRC. The first-tier tax tribunal dismissed HMRC’s claim for almost £250,000 for income tax and national insurance, which it claimed was owed for earnings over five tax years.

Mr Alcock worked for two clients, mostly on the government’s universal credit programme. He had previously been an employee of one of the clients before setting up RALC Consulting Ltd, through which he provided IT consultancy services. His work was largely the same as when he was an employee.

An important element of the case was whether or not mutuality of obligation existed between Mr Alcock and the clients. This is a significant aspect of employment status; employers are obliged to offer work and employees are obliged to accept the offer of work. The tribunal found that mutuality of obligation was lacking because the contractor was only able to charge for the work if it was completed and, at one point, he was not paid when a project was cancelled early. He took on financial risk when deciding whether to continue to work for the clients. By contrast, an employee can expect to be paid just for making themselves available for work.

One of the provisions allowed the contract to be brought to an end by giving notice, but there was no guarantee of work during the notice period. The tribunal considered that this lack of mutuality of obligation pointed towards self-employment.

Despite mutuality of obligation being an important factor in determining tax status, the government’s online tool for assessing an individual’s tax status, Check on Employment Status for Tax (CEST) has been criticised for not adequately addressing mutuality of obligation. CEST was updated in late November 2019, which was after this first-tier tribunal’s decision in favour of RALC Consulting Ltd. 

The tribunal also considered other relevant factors. If Mr Alcock was unable to work he could send a replacement but the client had to approve, meaning they could effectively veto his choice of replacement. This pointed to an employment relationship.

However, other factors indicated self-employment including the control test. Mr Alcock had significant control over how he worked. The nature of the IT projects meant that the clients needed control over when and where Mr Alcock worked, but this was different to the control they had over their own employees.

As this case shows, decisions on employment status depend on the detailed, individual facts. We can review your contracts and working practices to advise you on the application of the rules to your contractors. 

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.