A contracting professional accused by HMRC of being a “disguised employee” has successfully appealed against the taxman in a Birmingham tax chamber court.

The Revenue had claimed that Mark Daniels and his limited company, MDCM Ltd, owed PAYE and social security contributions because the nature of his work made him a direct employee, not an independent contractor.

He was engaged in work with a refurbishment and fit-out company, Structure Tone Limited (STL), via an employment agency (Solutions Recruitment).

Daniels explained to the court that he had delivered construction services for STL in the form of night shift management for fit-out developments across London. He had set up his company in 2004 and both he and his wife became directors and employees.

Daniels was typically paid a daily rate of £310 for the work he conducted for STL via the Solutions Recruitment agency in 2012 and 2013.

The Revenue argued that since the STL site manager gave instructions that Daniels followed when he was onsite, STL had exercised control over the work he carried out by detailing the particular tasks he undertook. He should therefore be classified as an employee and because (a) he would not accept a substitute to replace him if was absent and (b) because neither he nor his PSC, MDCM, incurred any financial risk during the work.

Conceding that the substitution issue did indicate an employment relationship, Judge Ian Hyde nonetheless found against HMRC and in favour of Daniels, as he had been paid a flat rate each day and enjoyed no notice period or employment benefits, both of which meant he was “not treated as an employee”.

Commenting on the ruling, Andy Chamberlain, Deputy Director of Policy and Public Affairs at IPSE, claimed that, while favourable for the individual contractor, it nonetheless showed that IR35 rules are too convoluted and intricate to apply with any certainty.

He said: “HMRC looked at the relevant factors and decided that IR35 should apply. The Tribunal looked at those same factors and decided that it shouldn’t. If HMRC, with all its expertise seemingly cannot make a correct determination, how are public authorities and individual businesses supposed to get it right?”

Chamberlain believes the ruling has implications for HMRC’s heavily criticised CEST procedure. He added: “It cannot be relied upon to make correct determinations which is why many organisations feel forced to take a blanket approach – pushing all off-payroll engagements into IR35 unfairly.

“If the Government extends the ill-judged IR35 changes it made to the public sector last year to the private sector, the chaos and uncertainty is only going to intensify.”

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