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HMRC loses ‘disguised employee’ contractor case

A contractor accused by HMRC of being a “disguised employee” has successfully appealed his case against the tax authority.

Judge Ian Hyde found in favour of Mark Daniels and his company MDCM who were appealing HMRC’s decision to pursue him for PAYE and social security contributions.

The tax body alleged that the nature of Mr Daniels’ work with fit-out and refurbishment specialist Structure Tone Limited (STL) via employment agency Solutions Recruitment Limited (SRL) meant he was effectively operating as a direct employee.

HMRC was pursuing Mr Daniels for unpaid taxes under the IR35 tax avoidance legislation brought in by the Labour government in 1999.

The law was designed to stop “disguised employment”, where workers had an employee-type relationship with a client but were receiving payments in a different way, such as setting up their own limited company.

Mr Daniels told the tax chamber court in Birmingham he had provided construction services for STL, typically night shift management for fit-out projects in London.

He set up his company MDCM, of which he and his wife are both directors and employees, to offer the services in 2004.

The court was told that in 2012 and 2013 Mr Daniels carried out night shift work for STL via the agency Solutions Recruitment Limited for a typical day rate of £310.

There was a separate agreement between the contractor and agency at a higher rate of around £370.

Mr Daniels said that during his time on site for STL he had followed the instructions of his site manager and managed the night shift, but was not invited to employee meetings.

He also said that he paid for his own expenses for food, travel and accommodation.

Mr Daniels added that he did not have a notice period and was not entitled to holiday or sick pay.

HMRC argued that STL exercised a level of control over what work Mr Daniels carried out by specifying the exact tasks he must perform as night manager.

It also contended that Mr Daniels should been classed as an employee because the contractor would not accept any substitute to replace him in his absence and because neither MDCM nor Mr Daniels incurred any financial risk as part of the arrangement.

Judge Hyde agreed that STL’s unwillingness to accept a replacement and the lack of financial risk did “point to an employment relationship”.

However, the judge rejected HMRC’s argument on the basis that Mr Daniels was paid a flat rate per day with no notice period or employment benefits, as well as because he was “not treated as an employee”.

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