Decade-long IR35 case remitted back to First Tier Tribunal

The Upper Tribunal (UT) courts have sent back a decade-long case to the First-tier Tribunal (FTT) for a fresh decision.

The case relates to RALC Consulting Ltd, the personal service company of IT contractor Richard Alcock, whose services to Accenture and DWP during the period 2010 to 2015 were found to be outside IR35 by the FTT in 2019, resulting in the dismissal of an almost £240k tax bill.

Initial FTT findings

The 2019 FTT’s findings included:

• Insufficient mutuality of obligation for an employment relationship.
• No express obligation for Accenture or DWP to provide minimum work or for Mr Alcock to accept work.
• Personal service was a contractual obligation, but not sufficient for an employment relationship.
• Lack of control exerted by end clients pointed more towards a contract for services.
• Other factors like Mr Alcock’s ability to work for other clients, no holiday or sick pay entitlement, and negotiation of terms pointed towards self-employment.

UT Hearing and decision

The UT, in its December 2023 hearing, primarily addressed two out of the seven grounds of appeal raised by HMRC:

• Failure by the FTT to properly determine the hypothetical contract.

• Errors in the FTT’s approach to mutuality of obligation.

The UT found that the FTT had erred in law by failing to properly formulate and apply the status tests to the hypothetical contracts for each engagement, and by regarding mutuality of obligation as a determining factor in the case. The FTT’s approach of focusing on the actual contracts instead of constructing and analysing the hypothetical ones drew criticism from the UT.  Additionally, the FTT’s view that factors such as the absence of an obligation to provide additional work and the right to terminate the agreement at will were inconsistent with mutuality of obligation was deemed incorrect by the UT.

FTT must start again

Rather than remaking the decision itself, the UT directed the case back to the FTT for a fresh decision. The FTT has been provided with guidelines for the rehearing, emphasizing the correct formulation of hypothetical contract terms, accurate application of the law on mutuality of obligation, and refraining from inferring views of the UT on other grounds raised by HMRC.

The FTT has also been advised to “bear in mind the implications of the case law authorities to which we have referred in this decision and, in particular, the Court of Appeal’s analysis of those authorities in PGMOL.”  We are awaiting the Supreme Court’s decision on PGMOL, which is expected to provide definitive clarity on MOO.”

Lessons for contractors and engagers from the RALC Consulting Case

This case yet again underscores the lengthy nature of IR35 disputes, and the potentially enormous costs involved. The complexity and ambiguity of IR35 is constantly reinforced and we are seeing more and more cases where HMRC claim courts are erring in their approach to status decisions. The re-hearing could of course have the same outcome as the original case, but not without the financial consequences of Mr Alcock having to defend himself again.

The significance of working practices over written contractual terms when determining IR35 status is highlighted again. Contractors and engagers should ensure that their working practices align with their contractual terms and seek specialist advice where necessary. Proactive compliance and staying updated on IR35 developments can also help contractors and engagers anticipate changes and challenges, reducing the risk of lengthy future disputes.