Despite four IR35 victories, forewarned is still forearmed.
This article considers in more detail the four Tribunal judgements handed down this year so far – all resounding victories for the freelancers in question. To recap, the cases were MBF Design Services Ltd (decision handed down in January); ECR Consulting Ltd (May); Marlen Ltd (June); Primary Path Ltd (July). In each case the enquiry lasted a minimum of five years and the average amount of tax and NIC at stake was £50,000.
In each of the Tribunal decisions, the judge laid down the parties to the engagement. For example in ECR Consulting the Client was Vertex Data Science Ltd (VDS), the Agencies were Best People/Spring Technology, ECR Consulting Ltd was the Intermediary and Elaine Richardson referred to as the Worker. These labels are important to understand the purpose of the IR35 Intermediaries Legislation because whilst one would consider an agency being an intermediary in performing its role as go between, between End Client and the contractor’s company, it is in fact your company which is the intermediary. IR35 allows HMRC to ignore the intermediary and create a hypothetical contract (hypothetical because one does not exist) between the Client and the worker. As the Tribunal Judge said in Marlen:
“The issue to be determined by the Tribunal is whether, had the arrangements taken the form of a contract between Mr Hughes and JCB, Mr Hughes would have been regarded as employed by, i.e. an employee of, JCB.”
So what is the starting point? Simply this: is the hypothetical contract a contract of employment (of service)? And the reference point for every tribunal is a case which was settled 43 years ago, but is still as relevant today as it was then. As the Tribunal Judge said in ECR:
“We are bound by the High Court’s decisions but not those of the Tribunal, although we are bound to consider them. In Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance  MacKenna J listed three conditions for a contract of service to exist:
(1) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master
(2) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make the other master
(3) The provisions of the contract are consistent with its being a contract of service
These conditions are fundamental to the creation of a contract of services and if any one of them cannot be met then the contract is not a contract of service.”
You will have heard these referred to as personal service/substitution, control and mutuality of obligations. These are the primary and key factors for determining status.
Nevertheless, you will also be aware that in each of these Tribunals, the Judges also considered in business factors and whether the contractor was taking financial risk.
In the first case to be decided, MBF Design Services Ltd it was determined that it was highly unlikely that Mark Fitzpatrick (the Worker) would have been able to send a substitute to work at Airbus (the Client), but the Judge noted two important points: firstly, the contract between Airbus and the agency did not require specific individuals but resources to undertake the work; secondly, that his inability to send a substitute was “not inconsistent with his having been engaged as a professional man whose personal expertise was valued as might be that of an architect or surgeon. Against the background of MBF’s well-established existence and its history of engagements with various end-users, Mr Fitzpatrick’s status as a freelance specialist in his area is entirely credible.”
In Marlen the judge believed that if a substitute had been required, JCB would have gone to the agency and noted that the Client’s representative said that he never expected Mr Hughes to provide his personal service to carry out the job. The fact that VDS were content to leave the choice of operative to the agency meant that the Judge in ECR could not accept that the work was personal to Elaine Richardson. In fact he noted that given that VDS was prepared to employ Elaine on a contract at £600 per day without ever having met her, he was satisfied that if Elaine had been unable to attend through illness or had been unsatisfactory, VDS would have returned to the agency under the substitution clause for them to supply another contractor with sufficient, skills, qualifications and experience. It was helpful that Elaine could confirm that she could have sent other people to do the work as she knew of at least 6 others who were suitably qualified.
In Primary Path, the importance of the terms flowing from the Upper Contract (Client to agency) through to the Lower contract (agency to your company) was highlighted and this was the case regarding control: “reserving to the Appellant (Primary Path) the right to determine the manner, means and methods required to ensure its services are performed to GSK’s satisfaction and reserving to GSK (the Client) the right to direct the Appellant as to where and when such services are to be performed.”
In other words the client may have control over ‘when’ and ‘where’ the work is performed – and presumably the client usually decides “the thing to be done” (Marlen) – but critically it is ‘how’ the work is done which determines where control lies. For slightly different reasons, all the Tribunals decided that control over how the work ways did not lie with the client and most came to the same conclusion as the judge in Primary Path:
“The level of control or supervision did not go beyond that which one would expect in the hiring of an independent contractor”.
Mutuality of Obligations
Simplistically put, this concerns whether the engagement includes the expectation that work will be offered and accepted. As far as HMRC are concerned, mutuality exists if work is provided and a fee received, but there is more to it than that!
In both ECR and MBF, the judges noted that there were occasions where the computer systems had failed and per MBF “the employees of the company would try and find something to do and make themselves look busy. By contrast contractors … found themselves stood down and unpaid until the problem was remedied.”
In both these cases, the contractors actually turned down work, in Marlen both JCB and Mr Hughes terminated contracts early and in Primary Path there was no sense that Phil Winfield was “standing ready” to carry out what ever tasks GSK required – he was there to fulfil a specific project. The Judge also believed that Phil had been paid only for the hours worked and had the project ceased temporarily or otherwise, he would not have been able to demand further work or payment, nor was there any intention of GSK to offer further work; this as indicative of a contract for services.
Related to this point, HMRC had argued that hourly rates were indicative of employment to which the judge took issue, believing that for someone of Phil Winfield’s skill and expertise a monthly salary in an employment contract would be more appropriate. He felt hourly rates were a feature of the charging structure of both professional firms and skilled tradesmen and if they pointed in any direction – it was away from employment.
In summary, the judges found in all four cases that there was no mutuality of obligation.
In business factors and financial risk
We have already noted the judges comments in MBF that “Mr Fitzpatrick’s status as a freelance specialist in his area is entirely credible.” And in all three other cases there were the following comments:
• “In ‘painting the picture’ it is clear to us that ECR is a genuine business and therefore not a target of the IR35 legislation.”
• In Marlen the judge summed up: “In both these instances, Mr Hughes lost income and it was a risk which he bore and accepted as a contractor but would not have been borne by and employee.” And “Looking overall at financial risk, there is evidence that Mr Hughes carried some financial risk, albeit not great and this would if anything point towards a contract for services rather than employment”
• In Primary Path, the judge concluded that the in business factors were “compelling” and he concluded that Primary Path had demonstrated that it was in business on its own account and that the services which it performed – including those under scrutiny by the Tribunal – were performed in the course of that business.
Some have seized on these in business/financial risk factors and determined that these are the most important. Yes, it is important to demonstrate that one is operating in a business-like fashion – having a designated office space, equipment, business insurances, using an accountant for your business, etc – are all relevant, but no-one has ever won an IR35 status case on the basis of these factors alone and don’t let anyone tell you differently!
Cases are won on the three key issues – personal service/control/mutuality – and even then it is not necessarily the case that one has to be able to deny all three to be able to argue that the contract is not an employment contract. However, in all four cases the Tribunals found conclusively in favour of the taxpayers in all three of the key areas and this is best summed up by Judge Lady Mitting who stated in Marlen, but could have been summarising on behalf of all four appellants:
“We did not find one single aspect which was consistent with a contract of employment. On the contrary however we did find certain aspects which in our view were compelling indicators that our hypothetical contract would have been one for services”.