My IR35 defence in ECR Consulting v HMRC and how it won out

A real-world account of how Control, Mutuality, and Substitution are the basis for a successful outside IR35 defence at tribunal

My IR35 defence, like your IR35 defence I suspect (should you ever be called to demonstrate your outside IR35 status) typically stands on three legs:

1) Mutuality of Obligation

2) Control (and Direction)

3) Substitution

None of these on their own are determinative of IR35 status, writes consultant business analyst Elaine Richardson, former director of ECR Consulting Ltd (dissolved).

Similarly, not one of them represents a silver bullet – you can’t send a substitute for a single day and expect to be outside IR35!

You have to show that, for all three of these IR35 defence legs, you’re not acting as an employee.

The key IR35 case law test in 2011, when my own IR35 case of ECR Consulting Ltd versus HMRC was heard, was: Is the contractor acting as a business in their own right? 

But to obtain a full answer to that ‘in business’ question, each of the three legs (or tests) above must be considered.

Part two of my IR35 battle against HMRC isn’t going to be a legal analysis (see part one here). Despite spending more time considering legal elements than I was ever comfortable with, the IR35 legislation isn’t actually my area of expertise.

How I acted under IR35 investigation

For legal points, I’d refer you to the First-tier Tribunal’s findings and judgment, issued by FTT judge Mr David S Porter.

Here I’ll provide a summary of how I acted and how the court found my IR35 defence to be convincing. These are two things that aren’t in the judgment and, until now, aren’t publicly available either.

IR35: Defending my limited company against HMRC – from the off

My defence against IR35 started in 1993 when I first started contracting. Coming from a family where all members were self-employed, I knew how important it was to keep business and personal finance separate, so of course that’s how I operated.

When IR35 was first floated in the 1998 Budget, I decided it was something to keep a close eye on.

I joined the PCG (now IPSE) as soon as the organisation started and, of course, I continued to keep records as if my life depended on it. This is clearly a family trait as I recently came across my grandfather’s farming diaries from the 1940s – ‘thorough’ doesn’t cover it!

Three ways to keep IR35 at bay

Last week I said IR35 insurance was something all outside IR35 limited company contractors should have. But I also said there were in fact three key things all Personal Service Companies need to do to keep the Intermediaries legislation from biting.

The second thing is simply ‘BEING’ a business at every turn.

The third thing is paperwork. Specifically, correspondence from all parties and the crucial task of keeping the documents like your life depended on it.

So in review, the three things every PSC or limited company contractor needs to do to keep IR35 at bay:

1. BE a business
2. Keep all documents and papers as if your life depended on it
3. Buy the best IR35 insurance you can afford

IR35 investigation insurance is worth its weight…

Just a word more about IR35 protection.

Cover in the event that HMRC launches an IR35 investigation into your limited company is worth its weight in gold.

Even without it I still would’ve fought the Revenue over IR35. But the status dispute would have come close to bankrupting my business.

The three IR35 defence legs

First leg: Control (and direction)

Now this is an area of IR35 I can give my opinion on. Especially when I see contractors posting on LinkedIn about “how to ask a client to take holiday?” and other such nonsense they shouldn’t have any truck with (because of point 1 above – BE a business).

Answer to that age-old ‘holidays’ question? Just politely inform the customer when you won’t be available.

Direction and control relate to the concept of a master-servant relationship as defined in law.

What control (and direction) looks and feels like

If a client can tell you what to do (“no you can’t take a holiday next Tuesday”), move you from one project to another without your input, or tell you how to code, then you’re subject to control and direction.

You must push back against it to continue to be outside IR35.

If a client ever wanted me to work on another project as a software development contractor, I insisted on a new contract to formalise the arrangement.

What about code reviews and PMs assigning priorities?

I was happy to accept ‘code reviews.’

But as to being told how to code? Well, if clients had those skills, they wouldn’t have needed to hire you or me in the first place!

I draw your attention to point 23 of the IR35 ruling in favour of my former limited company ECR Consulting:

“We do not accept, even with the qualifications [that the client team leader] advised us of, that she was able to tell Miss Richardson how to do the work or the time she should expend in doing so.”

What about being assigned “priorities?” Well, ‘priorities assignment’ is different.

I wasn’t a project manager, so I was happy for a PM to make that decision about the project’s priorities. But again, so long as the priorities or decision-making didn’t exert any control or direction over my company’s work.

Second leg: Mutuality of Obligation

Mutuality, or MoO as it’s sometimes known, is a tricky one.

HMRC has tried to define mutuality as ‘doing work and being paid for it.’ If this is the case, every plumber you ever use is your employee and wouldn’t that make for a fine mess?!

To me (someone who won their IR35 case against HMRC), Mutuality is ending a contract and being obliged to accept another.

From the client’s side, it’s being obligated to offer more work.

Anyone working as a genuinely self-employed freelancer will understand the level of ridiculousness that this interpretation of MoO throws up.

Third leg: Substitution

Even trickier than Mutuality is Substitution.

This doesn’t mean you DO substitute, it means you’re allowed to e.g. if you’re too sick to work for any length of time.

However, everyone ‘knows’ that becoming a freelancer suddenly makes you immune to all germs and you never seem to need so much as a sick day.

I think I took one day off sick in all my years of freelance contracting. And if I’m honest, I wasn’t sick at all I just fancied a day off!

Contracts

It’s not one of the three legs of IR35 defence I mentioned at the top, but your contract is the formal coming together of those three legs. A well-written contract can therefore really help your IR35 case.

But as was the case in my case, be aware it’s not only your contract with the agency that’s considered if your IR35 dispute ends up in court. There will also be a contract between the agency and client (‘the upper-level contract’) that you, as the contractor, aren’t allowed to see. Until it becomes a document for the court’s perusal, that is.

Next:

Always get an IR35 expert to review your contract

And if there’s something your contract review expert doesn’t like from an IR35 standpoint, get it changed.

Be aware on IR35 – contractor recruitment agencies will push back hard, as their contracts are standard. But you can often get a change shown up on your schedule. On this document, which is typically at the end of your contract, get it to state something like “Clause 3.11 does not apply.”

What about contracts and working practices?

Make certain that your contract matches your actual working arrangements.

If it doesn’t, it’s what actually happens that counts. So, even the best contract isn’t a ‘get-out-of-IR35-jail-free card’.

As to what happened with my assignments that HMRC accused of being inside IR35? The first involved a list of tasks that needed doing, including the dreaded JIRA tickets!

I decided which of these tickets I would work on and in what order based on my experience of previous work (including how easily I could get them done). Dealing with half a dozen tickets a day might look efficient but I’d rather take one that’s more difficult and leave the fix count race to others.

Working practices in ECR Consulting V HMRC (cont.)

For the second contract, I almost always arrived early mostly because there were limited free parking spaces. And for four days a week I left at a normal time, or a little later if the work was going well. On both contracts, I usually left early afternoon on Fridays.

This pattern of work at my discretion may go some way to the IR35 ruling (in my favour) stating:

“The fact that she could work the hours she pleased clearly shows that she was not controlled…in relation to her working practices”.

Timesheets, invoicing, holiday

Indeed, I recorded my own working time exactly (as required by the European working time directive). And for timesheets, I listed “7 hours a day.” It was simply the way that the recruitment agents preferred it and it kept things simple for the client.

Occasionally, I worked more than I invoiced, sometimes less, but I always had evidence to back up both.

I also never requested holiday. The company had a ‘holiday request system’ approved (or not) by management. When I wasn’t going to be working for a day or a week, I simply emailed the team manager and informed them that I wouldn’t be working. Nobody ever complained about this, but that’s likely because I never needed time off when schedules were tight.

As an outside IR35 contractor, it’s a question of organising yourself around the project.

Preparing with an IR35 defence/legal team

My legal team prepared me for the tribunal, held on 17th-18th Feb 2021. Their preparation of me wasn’t designed to prompt my answers but to equip me for the level of aggressive questioning I would receive.

The team (which included a former HMRC official) were good. And I likely wouldn’t have managed as well without them. That said, the actual questioning I was on the receiving end of in court ended up being several degrees of magnitude worse.

But at all times, what matters most is your absolute and utter confidence that you’re running a business and that you’re not caught by IR35.

Confidence & bad contract trumps jitters & a good contract

I’ve heard that barristers would rather have a confident client and a bad contract, than a watertight contract and an uncertain client.

I was never uncertain as to my IR35 status. But I was aware that HMRC would put their case in the terms which most suited them, even to the point of stating ‘facts’ that were clearly not accurate.

Tribunal – day one

Day one of my tribunal hearing as the director of ECR Consulting going up against HMRC was almost a disaster, logistically.

The documentation I had been sent mentioned “Leeds Courts”. So of course I turned up at the crown court very early (a habit I’ve never managed to break), and it took me half an hour to determine that no tax tribunals were being held there that day.

After a panicked call to my legal team, I learned that the tribunal was being held in an office block on the other side of the town centre! A frantic taxi journey later, I arrived at the correct address – luckily still well in time.

The first day was all HMRC and prosecution.

My indignant squeak

I’d been instructed by my IR35 defence team to sit quietly and say nothing (that was so very difficult). Apart from one indignant squeak I let out when I heard a complete and utter falsehood, I managed to keep schtum.

Two managers from my client, Vertex Data Science, were present and not for me but for HMRC. Fortunately, both were good, honest people and answered the judge’s questions with total candour. I think the best thing I heard to support my outside IR35 case was:

“We just needed someone who could do the job”.

This supports what I recommended in the first part of this series exclusively for Kingsbridge – contractors ought to regard themselves simply as a ‘resource that can do the work’.

In the IR35 dock…

Being on the stand myself and being questioned by the HMRC barrister was just awful. But, by then I was so tense that the HMRC barrister’s questions were answered with a touch of ‘sharp’ from myself. So much so, I believe I more than held my own.

Tribunal – day two

Day 2 at the FTT wasn’t quite as bad. It was my barrister putting my outside IR35 case.

And although there was a cross-examination, the HMRC barrister was clearly not happy with how things were going – and it showed!

Verdict and aftermath

The 12 weeks it took between the hearing and judgment seemed to take forever. But I remember taking the call from my barrister while at work on a different contract.

“You won,” he said, “appeal allowed”.

I was so happy that I suspect the whole department knew about it. It’s making me smile now just thinking about it. And I still regularly do both – think about it and smile because I have the summary judgment framed on my office wall!

How Kingsbridge can help

Navigating IR35 legislation and ensuring compliance can be challenging for contractors and businesses alike. At Kingsbridge, we offer tailored support including expert guidance on IR35 status assessments, compliance strategies, and risk mitigation. Our team is dedicated to helping contractors and businesses understand and adapt to the evolving tax landscape.

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To find out more, get a quote or contact us today.