The IR35 legislation is a tricky one to navigate as the onus of deciding whether an employee or contract worker is within or outside the ambit of IR35 lies with the company or contractor.
Recently, an IT contractor won an appeal against HMRC after the taxman mandated that the freelance professional owed over £200,000 in National Insurance contributions (NICs) and income tax as per the IR35 rules.
The legislation mandates that contract and interim employees who are in similar roles as PAYE employees have to pay the same amount of NICs and income tax as full-time employees, but they are not entitled to sick pay and holidays.
In March 2017, HMRC claimed that the IT contractor owed £78,842 in income tax and £164,482 as NICs from April 2010 to April 2015.
The contractor refuted these claims and approached the tribunal, which found that the contracts that the IT contractor had signed with its end clients were contracts for services rendered.
Hence, the contractor was not liable to pay the income tax and NICs that were assessed by HMRC.
At the same time, it provided HMRC with an avenue to appeal against the ruling.
Why did the IT contractor win the appeal?
The IR35 status test known as Mutuality of Obligation came to the rescue of the IT contractor.
This test determines whether a contractor is working as an employee without revealing the fact to avoid paying NICs and income tax.
However, this was not the case with the IT contractor, whose contracts clearly mentioned that they would get paid just for work that gets completed, which is not the case with employees.
Experts believe that HMRC should have been able to see clearly that IR35 did not apply to the IT contractor.
They believe that the investigation launched by the taxman was not conducted in a uniform manner and that HMRC could not corroborate the evidence it had collected.