HMRC Undermined

Many years ago Qdos Consulting represented a few freelancers who had been contracting to Airbus UK Ltd and were the subject of IR35 enquiries.

In the face of what appeared to be overwhelming evidence gathered by HMRC, these contractors were consigned to a fait accompli and settled with the Revenue. Part of that evidence comprised of a testimony from Airbus that they viewed a good number of contractors as no more than “bums on seats”.

Those same contractors and their compatriots must have greeted the recent First Tier Tax Tribunal decision in the case of MBF Design Services Ltd with mixed emotions.

Mark Fitzpatrick contracted to Airbus UK via his company, MBF Design Services Ltd, during the tax years covering 6th April 2001 – 5th April 2007 to provide design solutions for the A380 aircraft. Subsequent to an IR35 enquiry HMRC raised PAYE and NIC assessments for all years. The appeals for the two years ended 5th April 2005 involved two intermediaries as follows:

Airbus UK
↓
Morson Human Resources
↓
GED-Sitec Ltd
↓
MBF

The Tribunal was invited to formally allow the appeals for the years 2001/02, 2002/03, 2005/06 and 2006/07, leaving the 2003/04 and 2004/05 appeals to be heard. 

The contract between MBF and GED contained the following notable clauses:

An hourly rate of £21.47 for the first 35 hours per week. For hours above the initial 35, the rate increased to £23.24;
7 day notice period;
Right to withhold monies from MBF should their services prove substandard in any way;
Mr Fitzpatrick was not named anywhere but rather ‘Operatives’ could undertake the services. ‘Operatives’ were described as any person, firm or company engaged by MBF or its subcontractors;
MBF should use its reasonable endeavours to work the normal working hours;
Compliance with the Working Time Regulations 1998;
Whilst MBF were to have a reasonable amount of autonomy in the provision of the services they would be expected to comply with any reasonable request by the Airbus;
Any training or qualifications were to be funded by MBF;
Defective work to be rectified by MBF at its own cost;
A requirement for GED and the “Personnel” (not specified) to carry employer’s and public liability and professional indemnity insurance of £250,000.

A second contract in the chain between GED and Morson Human Resources (Morson) generally reflected the terms in MBF’s contract and also notably precluded Morson or Airbus from any entitlement “to exercise any supervision, direction or control over GED or the Operatives in the manner of performance of the Project.”  GED was also free to provide its services and those of the Operatives to customers other than Morson or Airbus.

The third contract between Airbus and Morson stipulated no fewer than 53 named persons, including Mr Fitzpatrick, to provide the services. Contractors names were grouped together and a total number of hours purchased from each group. There was no distinction as to the hours to be worked or the rate per hour per individual. Other features included:

All on-site contractors were required to complete weekly electronic timesheets;
Airbus was entitled to terminate the agreement at any time;
All work to be checked and approved by Airbus staff prior to formal acceptance. 

During the hearing HMRC produced a witness, a Mr Minh Pham, who was a lead designer employed by Airbus during the appeal period and responsible for a team of 4 employed designers and up to 40 contracted designers which, for a short while, included Mr Fitzpatrick. Unlike the other witnesses appearing, the Tribunal did not consider his evidence credible. Mr Pham admitted that his witness statement had been prepared for him by HMRC and he had considerable difficulty in reading it out due to a limited command of English. He was also hesitant and uncertain under cross-examination. The Tribunal was not satisfied that Mr Pham fully understood the contents of his witness statement.

HMRC sought to admit two unsworn witness statements made by Airbus officials, one a team leader and the other Head of Product Related Services. The contents of their statements was disputed and as they had not been called as witnesses the Judges ruled it unfair to allow such evidence as it was not capable of being tested.

Established Facts

The evidence given at the hearing established the following facts.

During the appeal period MBF was offered a number of contracts but Mr Fitzpatrick did not consider that his company was obliged to accept them. In support of this, he gave as an example a project in May 2004 where Airbus had requested him to assume overall responsibility but Mr Fitzpatrick had declined as the terms were not attractive enough.

Substitution was, in reality, impractical. From Airbus’s point of view substitution would have been near impossible to arrange as this would have meant changing Mr Fitzpatrick’s security clearances and passwords etc. If Mr Fitzpatrick was absent then the work would have waited until his return or be done by another designer. If MBF had sent a replacement then Airbus would have lodged a complaint to the agency as they specifically wanted Mr Fitzpatrick’s services.

Whilst it was clear that MBF’s work was subject to Airbus approval this was not because of the need to supervise Mr Fitzpatrick’s work but because of the need to integrate and harmonise the work of each contractor in the overall design of the aircraft and to measure it against aviation authority requirements. Although Airbus had the final say as to what should be done and when, they did not precisely direct how the work was done.

Mr Fitzpatrick told the Tribunal that he was unaware of what the core hours were supposed to be and that he came and went at his discretion but always informed Airbus of his movements. Sample timesheets showed that he often worked in excess of the standard 35 hours. The Tribunal deduced that Airbus did not enforce its policy of core hours working but rather it was left to the professional judgment of the contractors to ensure that their working practices did not compromise the project.

Contractors would work alongside Airbus employees and generally the ratio would be 4/5 contractors: 1 Airbus employee.

Whilst Airbus did not have control over Mr Fitzpatrick’s holiday absenses he would nevertheless inform Airbus of planned holidays to assist coordination. If Airbus did not like the timing of such absenses then they were entitled to terminate MBF’s involvement and did exactly that in August 2005. This, however, was not a dispute regarding holidays but because it suited Airbus’s own interests. MBF were given 4 days notice to terminate a contract that was less than a month in.

The highly specific work that Mr Fitzpatrick was involved in required specialist technical training. Some of this training was done in his own time and expense but he was also trained by Airbus at its expense in the use of computer-aided design systems known as CADD.

Tribunal’s Findings

Tribunal concluded that MBF had provided its services to Airbus under a contract for services. Firstly, there was a lack of mutuality of obligation required for a contract of employment to exist. An indicator of this was Airbus’s right to cancel the contract without notice.

Although both contractors and employees negotiate their remuneration when the opportunity arises, in the absence of any career structure MBF’s negotiation of fee’s for new work is typical of how an independent contractor would operate. Contrast this with an employee who would consider promotion as an equal means of improving their remuneration package.

The checking and approval of design work was an inevitable requirement of a project that comprised of interdependent constituents and was also subject to the approval of external authorities. In this respect there would have appeared to have been little difference in the position between employees and contractors but the difference was the absence of disciplinary or grievance procedures for freelancers, correcting faulty work at their own expense and the risk of being laid off without notice.

The working of basic or core hours, within reason, ensured that the necessary interaction between contractors and Airbus staff occurred. As Mr Fitzpatrick’s working pattern fluctuated however the Judges considered this to be untypical of a normal employee’s working habits.    

MBF’s profitability was dependant on the work and fee income available. This was put at risk on occasion when Airbus computers failures resulted in contractors being sent home without pay whereas employees remained on-site.

HMRC must have felt supremely confident going into this appeal given that the end client had served as a reliable ally in sealing the IR35 fate of many similar contractors in the past. This judgment serves as a shot in the arm for all freelancers and renewed hope that common sense is being applied by some Judges in matters of employment status.