Off-payroll working – where are we now on deciding status?

24 May 2024

The tribunal decision in the decade-long IR35 dispute in HMRC v RALC Consulting Ltd demonstrates the complex nature of the off-payroll working rules. 

HMRC introduced best practice compliance principles late last year, establishing a minimum standard for organisations who must apply the off-payroll working rules under Chapter 10 ITEPA 2003 (IR35). The key question now is: is this best practice guidance reasonable, given that tribunal judges at all levels seem to be getting it wrong?

What happened in the case?

IT contractor Richard Alcock, trading as RALC Consulting Ltd, has been entangled in a decade-long IR35 dispute with HMRC surrounding £240,000 in Income tax and National Insurance contributions (NIC).

The engagements in question relate to contracts with Accenture and the Department for Work and Pensions (DWP) during the tax years from 6 April 2010 to 6 April 2015. 

In October 2019, a First-tier Tribunal (FTT) judge upheld an appeal in Alcock’s favour. The ruling stated that Mr Alcock was in business on his own account, that Mutuality of Obligation (MoO) was not present, and that clients did not control the working relationship in a way that reflected employment. Consequently, the contractor won his IR35 case in 2019.

However, HMRC disagreed with this outcome and appealed, a process that took an additional four years. 

On what grounds did HMRC appeal?

HMRC’s appeal to the Upper Tribunal (UT) was based on two grounds.

  1. The FTT failed to determine the terms of the hypothetical contract(s) and apply the common law test of employment to those terms.
  2. The FTT erred in law in its approach to MoO.

Notably, as part of the submissions, HMRC raised legal arguments from case law decisions made years after the original FTT decision. 

What was the outcome of HMRC’s appeal?

HMRC won their appeal on both grounds. However, it was not a complete victory for HMRC as the UT remitted the case back to the FTT ‘with some reluctance’ because it did not feel ‘sufficiently equipped with the appropriate finding of facts to remake the decision’. 

This has resulted in a rehearing, with the FTT being instructed to decide not what the contract stated but to determine the terms of the ‘hypothetical contract’, 14 years after the event. 

What are the key takeaways?

The case joins the growing list of self-employed and IR35 tribunal cases, whereby HMRC and tribunal judges are consistently asked to re-review their homework as errors in law are being identified.

The long-running Atholl House case exemplifies this, where the Court of Appeal intervened after two judgements were ‘incorrect’. 

There is no doubt the rules on deciding status are complex, but it raises a fundamental question: if those presiding over tribunal cases, with all the information, historic case law, and an intrinsic knowledge of the rules, cannot apply them correctly, how can businesses, contractors and HMRC apply them with any confidence? 

At the end of last year, HMRC released their detailed best practice guidance, which included advice on making status determinations and sets clear and minimum compliance standards that organisations must apply from HMRC’s perspective. To avoid non-compliance, it is important that businesses and organisations familiarise themselves with these standards and ensure they are adhered to. 

How can RSM help?

This is an opportune time for organisations and businesses to review existing off-payroll working processes against these standards, especially in relation to deciding status. Any weaknesses and errors identified should be addressed. 

As we move forward, HMRC could take the view that organisations and businesses failing to consider this position are not taking ‘reasonable care’, which could lead to a risk of penalties and increased liabilities should any inaccuracies arise. 

For more information on any of the above, please contact Lee Knight, James Finlay, or your usual RSM contact.