Well, the IR35 world anyway. At some point during an IR35 enquiry it may be necessary to refer to useful case law to help a contractor emphasise, reinforce and support an aspect of their contractual arrangements.
Case law assists in the interpretation of the facts and coming to a conclusion as to the nature of a particular contract. Over the years the courts have laid down a number of tests, conditions or indicators which should be considered as a whole in determining employment status.
It is the principle established by a court in a particular case that is important as it may set a binding precedent but even then the courts may restrict or widen the application of a principle established in an earlier case.
IR35 has been with us now for over a decade and during that time there have been numerous cases that have been heard before the Special Commissioners (now Tax Tribunal), but fewer have proceeded to a higher court. Whilst Special Commissioners/First Tier Tax Tribunal decisions are useful to refer to they do not set legal precedents in the way that court decisions do and therefore do not carry the same weight.
Since 2000 HMRC have built up their own dossier of favourite IR35 case law that are referred to in their own manuals and it is useful for contractors to be aware of these and the status issues they relate to.
Synaptek Ltd v Young (2003)
Gordon Stutchbury was a consultant in software engineering and through his company, Synaptek Ltd, provided services to EDS via an agency, NESCO. EDS was itself providing services to the Benefits Agency.
The judge summarised the factors in the case that pointed towards self-employment but these were outweighed by the pointers towards a contract of service:
- Minimum 37.5 hours per week required which was broadly equivalent to a “normal working week”.
- The only risk borne by the contractor was the risk of insolvency of the agency or end client, despite there being other risk factors such as the Agreement could be terminated immediately if the services were not performed to the satisfaction of EDS.
- The duration was for a fixed period of 6 months rather than being a project based contract. The contract was therefore viewed as a time and skill set.
- Mr Stutchbury worked alongside EDS employees and had an EDS line manager, suggesting that he was integrated into the business of the end client.
- Mr Stutchbury was required to comply with all EDS instructions.
Although mutuality of obligations (MOO) was not cited as a factor either for or against employment, the judge did examine this factor and took MOO one stage further. It was accepted by HMRC that if there was no obligation on the agency to provide work for the entire period of the notional contract there was not sufficient MOO for a contract of service to exist. The judge distinguished between MOO beyond the contract and MOO within the contract and that mutuality should exist during the current contract and not just whether there is an obligation to offer and accept work once the current contract expires.
Usetech Ltd v Young (2004)
William Hood was a computer software specialist whose company, Usetech Ltd, provided services to ABB Ltd via a technical recruitment agency, NES International Ltd.
Mr Hood had argued that IR35 did not apply because a right of substitution existed in his company's contract with the agency and there was no obligation on the end client to provide him with work.
Unfortunately, the lower level contact was a standard contract that the agency used when engaging individuals through one man service companies. Whilst it contained a substitution clause this was not reflected in the upper level contract between NES and ABB. The Special Commissioner had described the right of substitution as being largely illusory and that the hypothetical contract would not have contained a substitution provision. The High Court judge went a stage further by saying that if Mr Hood had raised the substitution issue in negotiation with ABB then the end client would not have entertained this.
The minimum that ABB had to provide and pay for under its contract with the agency was 37.5 hours. There was also a termination clause that required 7 days notice by either party. The judge concluded that these terms would have also been a feature of the hypothetical contract and therefore the mutuality requirement would be satisfied.
Future Online Ltd v Foulds (2005)
Mr Roberts was an IT consultant and director of Future Online Ltd. Future Online provided its services to EDS via a contract with Elan Computing Ltd, the agency.
Having lost his appeal at the Special Commissioners, Mr Roberts took his case to the High Court and made two lines of attack on the Commissioners' decision. Firstly, he submitted that it was incorrect to regard EDS as the client and that for the purposes of the legislation, Elan was Future Online's client. The court, however, held that it was clear that EDS required the services of an IT specialist and it could not be said that Mr Roberts had performed those services for the purposes of Elan's business. EDS was the only party with whom it could be said that Mr Roberts performed services for business purposes.
Secondly, it was argued that the Special Commissioner had wrongly accepted that it was the right of control of the worker that was significant rather than whether control was actually exercised. The judge found that the Special Commissioner had correctly taken account not only of the terms of the contractual arrangements but of all the other circumstances in which Mr Roberts performed the services for EDS and found the criticism over the matter of control to be unfounded.
Mr Roberts had also claimed that the Special Commissioner had placed too much emphasis on the 'part and parcel of the organisation' test and that it had been used as an overall test. The Special Commissioner had found as fact that Mr Roberts was an integral part of the EDS organisation rather than just being part of a team working on a project but the judge found that the test had only been considered as one of the features pointing to a contract of service.
Dragonfly Consultancy Ltd v HMRC (2008)
Jon Bessell provided IT consultancy services to the AA through his own company, Dragonfly Consultancy Ltd. Dragonfly's arrangements with the AA were provided through an agency, DPP International Ltd.
In the High Court Mr Bessell made four contentions:
1. Personal service/substitution
Contention: That the notional contracts would have contained provisions relating to substitution which would have prevented them from being contracts of service.
Judgement: Mr Bessell was named as the consultant in two of the lower level agreements. Dragonfly was a one-man company whose purpose was to supply Jon Bessell's services and it was therefore obvious that the intention of both parties was that it would be Mr Bessell who would provide the services.
There was a substitution clause in the lower level agreement but this could only be used where the AA had expressly agreed to it. Each notional contract would therefore have been for the services of Jon Bessell and that a replacement worker could be used only if the AA had firstly given notice that a particular substitute was acceptable.
The Special Commissioners had commented that “The AA did not want any competent tester, it wanted Mr Bessell”. The absence of an express provision in the upper level contract permitting an unfettered right of substitution further supported this statement.
2. Right of control
Contention: The notional contracts would not have contained provisions conferring sufficient rights of control to create a contract of service.
Judgement: A schedule supporting the first lower level agreement demonstrated that Jon Bessell was to act under the direct supervision and control of the AA. Although the wording of subsequent schedules was amended this did not disturb the original intention. The judge even went as far as to conclude that the wording of the schedules, along with other alterations, may have only been amended for the purposes of IR35.
A clause in the agency's agreement with the AA showed that staff provided by the agency 'shall be under the full control and supervision of [the AA] on a day-to-day basis only regarding performance of the duties'. Mr Bessell had attempted to contend that this was akin to the control a householder would have over a self-employed tradesman but the judge disagreed and concluded that the degree of supervision and quality control went beyond being merely directed over when and where to work. Regular appraisals and monitoring of Mr Bessell went beyond what would be expected of a self-employed individual genuinely in business on own account.
3. Intention of the parties
Contention: The intention of the parties should have been taken into account, and if done so the conclusion would have been that Mr Bessell should not be an employee of the AA.
Judgement: Although it was considered irrelevant in this case in determining whether the engagement was one of service or for services, the judge said that a statement of intention should not be dismissed. It is only likely to be helpful however in borderline cases, helping to tip the balance one way or the other. In the majority of cases it will be of little assistance in characterising the relationship between the parties.
4. 'Worker' Status
Contention: The Special Commissioner failed to consider whether a person can be self-employed without being in business on own account. The law recognises the concept of an intermediate 'worker' status and the Special Commissioner should have taken account of this concept.
Judgement: As the general law of employment does not recognise a third intermediate category between employment and self-employment there was no reason to consider any other category. In the context of IR35 the only distinction to be made is whether the notional contract is one of service or not.
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