This is part fifteen of our serialisation of an IR35 enquiry. To access the previous parts please visit our IR35 Chronicles Index.
Four weeks after writing to HMRC, Turpin responded to Dee Fender in his typical bullish manner. Although not surprised that Turpin had decided that her client was caught by the IR35 legislation, she was concerned over the relatively short period of time it had taken for the Status Inspector to reach his conclusion. The main thrust of the letter read as follows:
“Thank you for your recent letter and the additional information provided therein.
I now believe that I have sufficient information to enable me to form a provisional opinion as to the application of the intermediaries legislation contained within ss 49 ITEPA 2003 et seq, commonly known as IR35.
Whether or not an individual is engaged under a contract of service is not just a NIC or tax matter but rather it is a question of general law. There is a considerable body of case law which provides guidance on what constitutes a contract of service. Case law shows that there is no formula by which a contract of employment can be identified but it is rather a question of examining all the possible factors which bear on the relationship between the parties, giving them their proper weight and making a judgement on their overall effect.
MacKenna J established the three pre-requisites of the existence of a contract of employment in his judgement laid down in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (1968):
A contract of service exists if these three conditions are fulfilled.
- 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;
- 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 that other master; and
- The other provisions of the contract are consistent with its being a contract of service.
Each case must be looked at in the light of its own particular facts as what may be compelling in one case in the light of all the facts may not be compelling in the context of another case. In matters of IR35 this involves examining both the evidence contained within the relevant contracts and the actual working practices in order to construct the hypothetical contract.
Under a contract of service a person is expected to give their own personal service whereas a self-employed person operates under a contract for services. If a worker undertakes to perform a task and is free to hire someone else to do it or give substantial help, it is unlikely that the worker is an employee. Engaging helpers at the worker's expense to assist in performing a task would point towards there being no requirement for personal service of the worker.
It would not have been possible for Mr Down to have engaged an assistant to help carry out his tasks due to BIG IT's confidentiality and security policy. You have told me that Mrs Down provided administrative assistance but this was neither essential nor specific to the actual work being carried out. This therefore is not the same as engaging a helper to assist with the contractual works.
The power of unlimited delegation will, in many cases, be conclusive evidence of the existence of a contract for services. The right to send a substitute however must be genuine for it to be taken into account in deciding employment status. Two provisos must therefore be satisfied in proving a right of substitution:
- The right to provide a substitute must be genuine; AND
- The worker must engage and pay the substitute.
Whilst I accept that your client's contract with the agency, Opportunity Knocks, contains a substitution clause, the same is not true of the upper level contract between the agency and end client.
The High Court in Dragonfly Consultancy v HMRC (2008) found that the Special Commissioners were entitled to find that the substitution clause in the consultant's notional contract with the AA (end client) would not have been such as to preclude an employment relationship. As in your client's case, there was an actual substitution clause in the agency contract with Dragonfly but this was not mirrored in the agency contract with the AA. Consequently, substitution was not a factor in this case.
BIG IT has confirmed that they would not accept a substitute worker in place of Mr Down and I therefore conclude that Mr Down was hired specifically to provide his own personal service until such time that the contract expired naturally or prematurely.
That Mr Down was obliged to provide his own personal service is a strong indicator of employment.
Control is a necessary condition of a contract of employment, so to satisfy the test laid down in the Ready Mixed Concrete case, there must exist a sufficient degree of control over the worker. In considering control it is important to remember that it is the right to control what the worker has to do, where it has to be done, when it has to be done and how it has to be done. It is therefore the right to exert control that is significant regardless of whether or not such control has been exercised.
A self-employed person will have control over the work that they undertake.
What has to be done
Where a worker is given instructions on what to do, then they are subject to a degree of control. Where a worker can choose what to do for themselves then they have autonomy over what needs doing.
If a worker can be moved from task to task as priorities change then there is a right of control over what is to be done. BIG IT has confirmed that they did possess that right to direct Mr Down to undertake tasks outside of the tasks specified within the contractual agreement. The end client has also stated that they had the power to overrule Mr Down in any decision making as to what needed to be done, ie, Mr Down was not free to exercise his own discretion as a self-employed person would be.
In the Dragonfly case, previously mentioned above, the contractor was under day-to-day control of the end client. He was not told how to do his work as he was a specialist, but he was told what to do and when to do it by.
Where work is done
Where there is a requirement for a worker to work at a specified place, then this is more characteristic of a contract of employment. BIG IT do not allow work to be undertaken at any location other than their site and, as such, your client was compelled to perform his tasks at the end client premises. Having said this, I do accept that there are circumstances when a self-employed person has no option but to carry out work at a client's premises. With this in mind therefore I am prepared to accept that this particular aspect of control is neutral.
When the work is done
Most employees are required to work hours prescribed by their employer. Details of these hours and when they will be worked will normally be set out in the contract of employment or other documentation.
Usually, self-employed workers are not subject to extensive control over when the work is carried out.
Mr Down was required and also appears to have worked a shift pattern of 08:30 – 17:00, Monday – Friday. It was also necessary for him to complete timesheets to enable BIG IT to verify that he worked those core hours. The evidence you have provided me does show some variations in hours worked but these are not significant enough to differentiate your client from a BIG IT employee.
Mr Down was also required to seek permission to take leave or time off from his work, in a similar fashion to an employee.
How the work is done
The right to control how the work is done can be a strong pointer towards employment. In this context, it is the ability of the engager to control the manner in which the worker performs their tasks and requirement that a worker follows instructions that is important.
In this case I do not consider this aspect of the control test to be appropriate as Mr Down is a highly skilled professional who was hired for his expertise and, as such, did not require direct supervision. In Morren v Swinton and Pendlebury Borough Council (1965), it was said, “Clearly superintendence and control cannot be the decisive test when one is dealing with a professional man or a man of some particular skill and experience. Instances of that have been given in the form of a master of a ship, an engine driver or a professional architect, or as in this case, a consulting engineer. In such cases there can be no question of the employer telling him to how to do the work; therefore the absence of control and direction in that sense can be of little, if any, use as a test.”
Overall therefore, I conclude that there was a sufficient degree of control exercised over Mr Down to it being a strong pointer towards employment.
Mutuality of obligation
Mr Down entered into a series of contracts, each lasting six months. When each contract expired or was about to terminate a new contract would be agreed. If a particular project had been completed then BIG IT would look to retain the services of your client in another capacity.
In the case of Synaptek v Young (HMRC) (2003), the judge distinguished mutuality of obligation beyond the contract and mutuality of obligation 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 is over.
Throughout the series of contracts Mr Down was engaged, there was a clear obligation for your client to carry out the contractual works in return for remuneration. Furthermore, BIG IT also felt obligated to offer Mr Down further work once a contract was terminated. I therefore conclude that mutuality of obligation existed both during and post contract. This is a strong pointer towards employment.
Overall therefore I am currently of the opinion that your client's contract with BIG IT falls within the IR35 legislation.
If you disagree with my opinion then I shall be grateful if you will let me have your response within 30 days of this letter setting out your reasons why you disagree.”
Next week: Not taking it lying down