ECR Consulting v HMRC: How I beat IR35, by Elaine Richardson

A software developer who vanquished HMRC says there’s an IR35 defence trinity that no outside IR35 limited company contractor should be caught without.

Weeding the asparagus bed in the crisp March sunshine last week took me back to another spot of gardening I was doing — on November 9th 2005.

On that also semi-bright afternoon, a dark “cloud” came over me (as the UK’s contractor body would later call it after I beat IR35), when my phone rang, and the caller said they were ringing from HM Revenue & Customs.

And no, writes Elaine Richardson, formerly of ECR Consulting Ltd (dissolved), the call wasn’t a scam!

The IR35 investigation into ECR Consulting Ltd – I always knew was coming

Before the HMRC official even uttered the dreaded “I-R-3-5”, which floated into my ear and immediately down to the pit of my stomach, I must confess — I always half-expected to be subjected to an IR35 investigation.

Yes, I had consistently operated as a business, and never someone else’s employee since being made redundant in 1993. And so I thought and acted as a business long before IR35 was floated in 1999.

Also yes, my limited company ECR Consulting Ltd had its very own company domain, website, and advertised. Via me, ECR Consulting had declined work because it wasn’t commercially viable to take on. I’d always kept business and personal finances separate and without fail took holidays when I wanted, informing my three clients (as of November 2005), that services simply wouldn’t be available on those days.

In Business On Your Own Account v Sod’s law

But all this ‘in business on my own account’ good stuff didn’t matter.

It just seemed likely to me that an HMRC investigation into my IR35 status would rear its ugly head.

I was a Cobol programmer, where numerous laws of software development apply. Well, the astonishingly technical ‘Sod’s law’ told me that despite my numerous ‘in-business’ badges, I’d still face an attempted raid under the Intermediaries Legislation. One day.

Not that the HMRC phone caller on November 9th 2005 got to the point straight away.

HMRC: Can I ask you some VAT return questions?

For much of the call, the Revenue official asked me a series of questions which appeared to pertain to VAT, indicating a potential VAT inspection into my company’s accounts.

It was enough to make me put down my trowel.

But I wasn’t majorly unsettled. My understanding of Value Added Tax was pretty decent, and my limited company’s VAT records and VAT returns were squeaky clean.

At the end of the phone call, with the tax official’s curiosity about my VAT compliance seemingly satisfied, I was asked:

Are you familiar with IR35?

When I answered “Yes,” the HMRC official said something akin to: “Well, you will be hearing from us.” And then the line went dead.

If I felt intimidated, the greater feeling was vindication.

After all, this call had proved that I was right to foresee being IR35-probed. This nagging feeling that one day I’d face an IR35 inquiry was why I had, many moons ago, decided to buy IR35 protection insurance.

IR35 insurance: I’m a software development contractor who snapped it up

In fact, due to being the sort of person who takes comfort in sensibly prepping for the worst, I took out IR35 protection insurance pretty much as soon as it became available.

I would say that IR35 insurance is one of three key things that all limited company contractors operating outside IR35 should have. The other two I’ll share another time.

HMRC’s fateful phone call: six life-changing things it rang up

But what I didn’t expect, or what I didn’t realise from the HMRC phone call — a call that still crosses my mind when gardening some 20 years later — was that it would lead to:

• Me battling HMRC for five-and-a-half years due to it deeming me inside IR35 at Vertex Data Services (VDS) for the 2002-2005 tax years;
• A tax claim of approximately £65,000.
• My IR35 defence (which hinged on Control, Substitution and MoO) being so weighty it would need to be sent in large boxes by courier;
• HMRC demanding every timesheet going back seven years; me blocking its calls, yet it sending me lots of inappropriate letters;
• Going to court to defend my outside IR35 position against HMRC, in what became the two most unpleasant days of my life;
• Waiting 12 weeks for a judgment to tell me what I already knew (despite a client-rep taking the stand for HMRC) — namely, that IR35 didn’t apply to my engagements.

I will flesh out these six points in this four-part series, here, exclusively for Kingsbridge.

I’ll cover how I came under IR35 investigation by HMRC; what the IR35 investigation into ECR Consulting Ltd entailed and how, ultimately, I beat HMRC. (Spoiler alert: essentially I was running a business and so wasn’t a disguised employee). I’ll also feature in a Q&A.

IR35 investigation triggers? Here’s my best guess about mine…

But first, back to November 9th 2005.

In a moment after the call, in my shed and having hung up my trowel for the day, it dawned on me what the trigger of this potential IR35 investigation could be.

N.B. I say ‘potential’ because I didn’t actually receive HMRC’s tax demand for me being allegedly caught by IR35 at VDS until early December 2005. So I had a four-week gap between “Are you familiar with IR35?” and being formally accused of being caught by the Intermediaries legislation.

I don’t know to this day but I suspect that my IR35 investigation trigger was because one of my VDS contracts came with a day rate that was rather higher than the average. VDS required someone who knew a specific piece of utilities billing software (the Accenture Customer 1 Billing System). They were therefore prepared to pay a premium.

A resource to do the work — with no interview required

VDS took me on without an interview, on the basis that I was a resource that could do the work. This is how I recommend all outside IR35 contractors regard themselves — as a resource that can do the work. Think of yourself as nothing more and you’ll stay close to the safety of the outside IR35 tracks.

Anyway, the contract ended abruptly after VDS’s client cancelled the work, despite me only having signed a new six-month contract with VDS just a few weeks previously.

Three months later, I was approached by VDS to work on a different project, at a different location to tailor the same software for a different end-client, albeit at a much lower, market-aligned rate.

The temporary labour market was poor at the time so I took the contract.

Details that fed into my Substitution and Mutuality arguments

The above details, while seeming small, are crucial. They are crucial not just to my Substitution and Mutuality Of Obligation arguments (see the next instalment of this series, exclusively for Kingsbridge) but also to my likely IR35 investigation trigger. HMRC seemed determined to look at all this work on behalf of VDS — and the duration that work clocked up — as one single contract, when it wasn’t.

Of course, I didn’t definitely know any of this would become a ‘thing’ when I was locking up my garden shed on November 9th 2005. Nonetheless, my thoughts were now racing. I came inside and went upstairs to go and think in my office — a “dedicated business area,” as the FTT ruling me to be outside IR35 would describe it on Feb 18th 2011.

On the phone about IR35 insurance details (your policy may include a calming effect)

Sat down, but now feeling a little angry at the HMRC caller’s implied accusation that I was a disguised employee, I picked up the phone to the PCG (now IPSE).

They are the UK’s contractor body, of which I was a member.

Similar to having a dedicated business area, having a membership to a professional business organisation is an outside IR35 factor which wasn’t lost on the First-Tier Tribunal (FTT). Such business body membership is an outside IR35 signpost that all contractors shouldn’t ignore as part of protecting their position.

I wanted to ring my IR35 insurance provider.

It might sound strange to those who haven’t come under the shadow of IR35, but merely getting through to your IR35 defender, of sorts, and hearing IR35 insurance policy details actually calms you down. It’s a good feeling because the very thing you put away to help is finally going to come into its own.

Don’t speak to you-know-who

Contractors who come under IR35 investigation, even an investigation related to the off-payroll working rules of April 6th 2017/2021, are often advised not to speak with HMRC directly.

Such advice is right on the money. It was given to me and it’s advice I’d urge contractors to follow.

In my case, I did not speak again to HMRC apart from a short phone call where I recall saying:

If you are who you say you are, you have my accountants’ and lawyer’s details. Please contact them.

HMRC didn’t listen. In the ensuing weeks and months, HMRC phoned me so often I had to block their phone number.

Questions by HMRC pertaining to the IR35 investigation were eventually provided in writing. Their questions were answered by me in writing, via my legal team and with my team’s input.

The IR35 defence trinity

I’ve already highlighted the value of membership to a business organisation as a helpful outside IR35 pointer, and I’ve highlighted the value of IR35 insurance.

A stellar legal team (as I had) probably completes the IR35 defence trinity.

I would go so far as to say that I owe my legal representatives my sanity for those awful two days I spent in court, and for the weeks of preparation before my tribunal hearing.

Papers, please

In my “dedicated business area” and after speaking about all things IR35 insurance, I felt better, hung up the phone and checked my paperwork.

Limited company contractors probed by HMRC even at just the telephone stage should do the same. Review your paperwork from your IR35 insurer to ensure it’s all up-to-date. In my case it was a bit unnecessary because I knew for certain it was up-to-date. IR35 cover in the event an inspector calls –literally in my case, and under the guise of VAT questions — is just too important to let lapse.

What sort of contractor are you, or do you want to be?

But I’m aware this is just me, one person, ‘speaking!’ Perhaps it’s all to do with personality-type.

And who am I? Well, I’m the sort of person who was investigated under IR35; used tax investigation insurance to fund my legal fight against HMRC’s assessment, got that assessment thrown out — and yet, just for safety’s sake, I still have every email exchanged at the time.

I’m also the sort of person who doesn’t actually like gardening, but does like the end result. It’s a point I’ll leave you with, before I reveal more about the arduous process of taking my IR35 status to tribunal but ultimately, winning.

How Kingsbridge can help

Navigating IR35 legislation and ensuring compliance can be challenging for contractors and businesses alike. Kingsbridge offers 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.

Kingsbridge also offers a range of flexible business insurance options to support contractors, including Professional Indemnity, Public Liability, and Employers’ Liability cover, as well as add-ons like Cyber Insurance and Director and Officer’s Liability.

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