Special Commissioners of Income Tax - "IR35" Appeals

 

Supplement to the Explanatory Leaflet about appeals and other proceedings before the Special Commissioners.

Contents

1. What is an IR35 appeal?

 An IR35 appeal is an appeal against a decision of the Inland Revenue that payments made to intermediaries such as service companies should be treated as earnings of the worker for the purposes of income tax and/or national insurance contributions.

In IR35 appeals the worker is called "the worker", the service company (or other intermediary) is called "the intermediary", and the person, firm or company to whom the worker supplies work is called "the client".

2. Why is it called an IR35 appeal?

On 9 March 1999 the Inland Revenue issued a press release called "Countering avoidance in the provision of personal services". The press release was number IR35. The legislation proposed in the press release was subsequently enacted and came into force in April 2000 and has come to be known as the IR35 legislation.

The legislation changed the treatment of payments made to intermediaries. The result is that, in certain circumstances, payments to an intermediary are treated as earnings of the worker in respect of employment. The changes apply to both income tax and national insurance contributions.

3. What legislation applies to IR35 appeals?

Section 60 and Schedule 12 of the Finance Act 2000 apply to IR35 income tax appeals.

Section 4A of the Social Security Contributions and Benefits Act 1992 and Regulation 6 of the Social Security Contributions (Intermediaries) Regulations 2000 SI 2000 No. 727 apply to IR35 national insurance contributions appeals.

4. What usually has to be decided in an IR35 appeal?

Normally it has to be assumed in an IR35 appeal that there is no intermediary. The question which then has to be decided is whether the worker should be regarded as an employee of the client.

5. Why is an IR35 income tax appeal unusual?

An IR35 income tax appeal is unusual because it is the intermediary which receives the decision from the Inland Revenue and so it is the intermediary which is the appellant in the appeal. However, the two persons most affected by the decision of the Inland Revenue are the worker and the client and neither of these are the appellant in the appeal.

6. What will I have to show?

As in almost all other appeals the burden of proof in an IR35 appeal is on the appellant. That means that it is up to the appellant to show that the Inland Revenue are wrong and that the worker should not be regarded as an employee of the client. A number of factors are relevant but none is conclusive. Some relevant factors include:

    (1) how the payments for the work are calculated; whether this is by the volume of work done or by reference to the number of hours worked;

    (2) whether the worker gets paid for sickness and holidays and what the pension arrangements are;

    (3) whether the worker's absences have to be approved in advance;

    (4) whether the client can control what, where, when and how the work is to be done;

    (5) whether the worker must do the work personally or whether he can provide a substitute;

    (6) whether the worker provides his own tools and equipment;

    whether the worker is part and parcel of the client's organisation;

    (8) whether the worker occupies a post (such as General Manager or Secretary) in the client's organisation;

    (9) whether the worker has a job title in the client's organisation;

    (10) whether the worker works continuously for the client or whether the worker has a series of engagements;

    (11) whether the worker hires his own employees;

    (12) whether the client is obliged to offer work and whether the worker is obliged to do the work;

    (13) whether the worker works, or can work, for other clients;

    (14) whether, and under what conditions, the contract can be terminated by the client;

    (15) whether the worker assumes any financial risk; and

    (16) whether the worker has an opportunity to make a profit on his own account.

7. What documents will I need?

Relevant documents will include any written contract between the worker and the intermediary and any written contract between the intermediary and the client. If either of these contracts have been varied in writing then the documents about the variation will also be needed.

8. What oral evidence is likely to be needed?

Since the question to be decided is whether the worker should be regarded as an employee of the client it would be helpful for both the worker and someone from the client to give oral evidence about the factors mentioned in 6 above. Oral evidence would also be useful about: the extent to which the terms of the written contracts have been carried out: whether there has been any unwritten variation in the contracts: and whether any additional terms have been implied into the contracts.

9. How should I get evidence from the client?

You can ask someone from the client to attend at the hearing of your appeal and to give evidence on your behalf.

If you wish to make sure that someone comes then you can apply in writing for a witness summons. Please read paragraph 6 of the Explanatory Memorandum which tells you how to do this.

10. Does the witness evidence have to be in writing?

It is very useful for a witness to write down his evidence before the hearing of the appeal. This means that he has time to think about what he is going to say and can check any matters like dates etc. A written document containing the oral evidence of a witness is called a witness statement. It would be useful for each witness statement to cover, as far as possible, the matters mentioned in 6 and 8 above as well as any other matter which the witness wants to mention.

11. Must the documentary and witness evidence be disclosed in advance?

It is a great help if copies of both the documentary evidence and the witness statements are sent in advance. Sometimes the Special Commissioners direct that this should be done. If the Inland Revenue agree with the contents of a witness statement it may not be necessary for the witness to attend the hearing. If no directions have been given in your appeal then it would help if both you and the Inland Revenue were to send copies of all the relevant documents and witness statements to the Clerk and to the other side fourteen days before the date of the hearing of the appeal.

Issued by

The Presiding Special Commissioner

15-19, Bedford Avenue
London WC1B 3AS

scitexpl
21.03.02
Revised 21 March 2002
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