This is part sixteen of our serialisation of an IR35 enquiry. To access the previous parts please visit our IR35 Chronicles Index.
Dee Fender wasted no time in e-mailing Turpin's latest letter to Neil Down which was hastily followed by a telephone call to Dee from a perturbed Neil.
The IR35 expert soon brought a sense of calm to the conversation and pointed out to her client that, knowing Turpin's reputation, this initial opinion was only to be expected and this was only a further reminder that the IR35 road ahead of them was likely to be a long and winding one.
Neil quizzed his tax agent as to whether or not she still believed he had a strong case to present that his company's contract with BIG IT fell outside of IR35. Mrs Fender was unswerving in her belief that the facts and information presented to her were enough to defend her client's position, although she did add the caveat that if there was any additional information that Neil could provide to strengthen the case then he should not hesitate in providing her with this.
She told Neil that she would pen a draft response within a few days and e-mail this to him for his perusal and approval.
True to her word, Dee Fender e-mailed the following missive to Neil within several days of their previous telephone conversation:
“Thank you for your letter dated………
Whilst I am not surprised to learn that you have come to the opinion that the contract between BSOD Ltd and BIG IT fall within the intermediaries legislation, I am surprised and concerned at the rapidity and eagerness displayed by you in reaching that conclusion. Your opinion is premature and only highlights the attitude of HMRC that was criticised in the Special Commissioners case of MAL Scaffolding (2006) and I quote, “The Commissioners appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers there if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking.”
You have only focused on a selected number of status factors, albeit that they are the main tests that form the 'trinity' of employment status, but you cannot simply ignore the other, minor, tests just because you find it convenient to do so to support your opinion. May I remind you that to prove the existence of a contract of service, the Ready Mixed Concrete ruling requires all three conditions to be fulfilled and not just one or two, viz:
Personal service and mutuality of obligation ; and
All other provisions of the contract are consistent with a contract of service.
Whilst there may have been practical hurdles to overcome should my client have wished to engage helpers on site, this would not have been impossible. Had BSOD identified the need for short or long term outside assistance, then they could have waited until security clearance had been approved before engaging such help. That BSOD chose not to employ such assistance was a matter of choice. My client was able to cope with the workload sufficiently without needing to resort to expending unnecessary monies on either an employee or sub-contractor and was therefore able to increase the profitability of the company.
I reiterate that BSOD's contract provides my client with a right of substitution. I have asked you to provide further details of the clause that appears in the upper level contract that you are part relying on to support your contention that personal service of Mr Down was a requirement of the contractual arrangements. Please now furnish me with the previously requested information.
That my client chose not to invoke the substitution clause does not detract from the fact that a genuine right of substitution existed.
What has to be done
BIG IT could not move Mr Down from task-to-task as you imply. My client has already informed HMRC that there was an occasion when he was asked, not told, to assist on a different piece of project work. My client accepted the work because it suited him and BSOD was able to enhance their profits by so doing.
Comparison to the Dragonfly case is not appropriate here as Mr Down was not under the same level of control. It was necessary for my client to need to know what needed doing otherwise how would he have been able to carry out the work? Once he was made aware of BIG IT's requirements my client was then left to get on with the work in hand.
Where work is done
I agree that this aspect of the control test is neutral but it cannot be overlooked that my client did undertake some of the work from home.
When the work is done
Whilst the BIG IT site operated core hours of 08:30 – 17:30, Monday – Friday, this was more applicable to employees of the end client. Contractors did have a degree of flexibility within these core hours. There were many occasions when Mr Down would start and leave earlier. My client chose, in the main, to provide the services for the maximum length of time so as to increase profits of the company and not because BSOD were obliged to. So long as the project was completed within deadline, BSOD had a degree of autonomy over the hours worked.
Mr Down did not have to seek permission to take time off in the same manner as BIG IT employees. It was necessary to give the end client sufficient advance notice because of project deadlines and also out of business courtesy.
How the work is done
BSOD was specifically hired because of their specialist knowledge, expertise and increasing reputation.
It is typical of HMRC to gloss over this point because it suits their argument. This aspect of the control test is most important and cannot be swept under the carpet as you have sought to do. As I have mentioned above, once BSOD was given the project specifications they were then left to get on with the work without interference from BIG IT.
You will note that the lower level contract lends itself to the fact that control rested with my client.
Mutuality of obligation (MOO)
BSOD was only engaged for a period of six months at a time. The company therefore was under no expectation that further work to be offered once a particular contract reached its natural termination date. Neither was there an obligation on BIG IT to offer such work.
My client's contract contains termination clauses that could be invoked by either party in certain circumstances. Such clauses would not be appropriate in an employer-employee relationship, demonstrating that there was an absence of MOO for the duration of the contract.
Business on own account
BSOD operate out of a dedicated office in Mr Down's home. That office contains an array of office and IT equipment that the company has invested in.
My client has their own printed stationery and business cards, has to meet their own expenses and overheads as evidenced by the attached accounts covering the period of enquiry.
May I remind you that in Market Investigations Ltd v Minister of Social Security (1969), Cook LJ said, “Is the person who has engaged himself to perform these services performing them as a person in business on his own account? If the answer to that question is 'yes' then the contract is a contract for services.”
It is clear that BSOD Ltd are a bona fide business and therefore satisfy the test laid down in the afore-mentioned case.
Apart from the financial overheads and capital investment previously mentioned, it has been confirmed that any defective work caused by BSOD would have had to have been corrected in the company's own time and at their own expense. To protect against this and other associated risks, BSOD expend material sums of money each year on necessary business insurances.
BSOD was also exposed to the possibility of late paid invoices and if BIG IT became insolvent BSOD would receive no payment for their services in the way that employees would.
Termination clauses also highlight the risk of BSOD's contract being terminated early in specific circumstances.
BSOD was hired to be an accessory to the business of BIG IT and was not an integral part of it. When on site, all contractors are provided with a colour coded security pass that clearly distinguishes them apart from the ordinary workforce.
When on site, Mr Down was provided with temporary working facilities and although he was given access to internal e-mail and telephone, for business purposes only, the word 'contractor' appeared next to his name on any internal listings.
Mr Down assures me that he was expected to contribute to any BIG IT social functions he attended and can produce evidence of such if required.
I have already stated that my client's contract permits BSOD to provide their services to other customers so long as they are not competitors of BIG IT. I did ask you to provide details of any conflicting clauses that appear in the upper level contract but, again, you have failed to do so.
Mr Down was not and did not receive any of the ordinary rights associated with employment, such as holiday pay, pension rights or benefits-in-kind, from BIG IT.
Intention of parties
Whilst I accept that the mutual intention of both parties to create a relationship of self-employment is not conclusive it still has to be taken into account, as stated in Dragonfly Consultancy v HMRC (2008). The lower level contract clearly stipulates the desire of both parties to create a self-employed relationship.
I therefore conclude that my client's contract with BIG IT falls outside of IR35 and look forward to receiving your agreement to the same.”
After receiving Neil's approval, Dee Fender submitted her response to Mr Turpin at HMRC.
Next week: Turpin is not easily persuaded