The Northern Light case – confined to history, despite being reported in June 2021!
The recent IR35 appeal case of Northern Light Solutions Limited v HMRC (2021), heard in the Upper Tax Tribunal, once again highlights the difficulties with understanding and applying these tax rules effectively. Employment tax status is a complex area, based on case law which arguably needs to be codified into statute for certainty and simplicity.
This case was a challenge under the IR35 legislation contained in Chapter 8 ITEPA 2003 (rather than the Chapter 10 IR35 legislation which was changed in April 2021 for end hirers to take responsibility for administering the legislation). This meant that it was the personal service contractor, Northern Light Solutions Limited (within which Robert Lee was the director and shareholder), which had responsibility for applying the legislation (and relevant employment status tests established by case law) to the engagement with its end client, Nationwide Building Society.
Northern Lights had engagements with Nationwide Building Society spanning 2007-2014 – tax years which preceded the changes to IR35 in April 2021. The end client is relevant here because, under the April 2021 IR35 changes, public sector, large and medium-sized businesses have the responsibility for assessing the IR35 status of the engagement, rather than the contractor. Nationwide, in this instance, would therefore be required to assess the engagement with Northern Light Solutions and issue a Status Determination Statement confirming the same for engagements from 6 April 2021 onwards.
The employment status tests used to assess whether tax should be deducted at source before the contractor is paid, remain unchanged. How the courts have applied these tests to the working practices in the Northern Light case remains of interest to IR35 geeks, but this is largely limited to the facts and evidence provided at the hearing, so there is little that we can take away here and no new precedents have been set in this case. It is clear that this is a borderline case. Interesting, however, this case is unlikely to be replicated today with Nationwide if Chapter 10 is applied to the engagement.
An easier ride for end hirers? Definitely!
Chapter 10 ITEPA 2003 (AKA IR35 for hirers) contains a ‘reasonable care’ obligation. Therefore, as long as the client uses reasonable care to assess the IR35 status of an engagement, they avoid the tax liability. HMRC may disagree with individual assessments, but as long as reasonable care has been taken, there will be no tax liability.
Future IR35 cases based on Chapter 10 will be of interest because they will involve arguments as to whether the ‘reasonable care’ threshold has been met, ahead of getting into the detail of how the tests have been applied to a specific engagement. Hirers, with deeper pockets and bigger risks, are more inclined to take cases through the appellate courts resulting in greater clarity of the law and precedents being set which will assist both contractors and engagers with their IR35 burdens; but beware, there is likely to be fewer of them!
There is HMRC guidance on what constitutes reasonable care. This, in my view, lowers the bar for hirers to comply with their IR35 obligations and make the IR35 world a lot clearer and easier to manage for hirers within the scope of Chapter 10; but why isn’t the same ‘reasonable care’ provision in Chapter 8?
Contractors who engage with overseas clients or small businesses will still be assessed under the Chapter 8 ITEA 2003 obligations (AKA IR35 for contractors), but even if they take reasonable care, which may include using HMRC’s CEST tool or taking professional advice from solicitors, the contractor is still assessed by HMRC on whether s/he has applied the employment status tests to the facts of the engagement in the same way that HMRC consider appropriate.
There is an imbalance in the law, simply due to who in the supply chain is responsible for the IR35 assessment. Arguably, this should be the next thing on HM Treasury’s to-do list to fix. Until then, contractors will incur the time, energy and expense of rolling the dice with the tax tribunals to see if they applied the employment tax status case law correctly to their (chapter 8) engagement.