IR35 – Impotent HMRC Arguments

A contractor who, by his own admission, was brought in as a resource to effectively make up the numbers, won his appeal against tax and NIC assessments raised under the IR35 legislation for the five years ended 5th April 2007, ending a two year battle.  

In this article we analyse the case in depth.

Gary Hughes provided engineering, design and drafting services, via his company, Marlen Ltd, to JCB and one of its satellite companies during the period April 2003 – April 2007 through a series of contractual engagements.

Each engagement was arranged by DDC Precisions Ltd (DDC), a JCB preferred agency.  The first engagement with Compact Products Ltd (JCB satellite company) ran from 31st March 2003 – 6th February 2004 and was covered by four contracts; three for three months each, and one lasting four weeks.  

The final contract, however, was terminated on 25th January by the serving of notice on 20th January by Compact Products brought about as a result of a budget deficit.

Two weeks after the early termination of the Compact contract, Marlen was offered a contract by JCB but this time, Mr Hughes terminated the contract early, by serving a one week notice period, to take up a more lucrative contract with Rolls Royce.  The engagement with JCB covered the period February 2004 – April 2007 and involved nine continuous running contracts.

Each engagement that DDC offered to Mr Hughes was by way of a Purchase Order letter that set out start and end dates and described the services as “engineering resource support”, further defined as mechanical design engineering expertise or checking expertise. This document took the form of a personal letter to Mr Hughes.

JCB used contractors for two purposes. One was to provide a skill or an aptitude that was absent from their workforce or to provide extra resources when necessary. It was for this second purpose that Mr Hughes freely admitted he was brought in. There were employed senior design engineers with the equivalent degree of skill and expertise working at JCB but his recruitment arose out of a shortage of such skilled manpower on specific projects.

At the Tribunal hearing Mr Hughes gave oral evidence and also relied upon an unchallenged witness statement from an international engineering manager at JCB. HMRC called no oral evidence. The crux of the appeal was won on the issues of control and mutuality of obligations, although Lady Mitting, the Tribunal Judge, did consider the other status factors for the sake of completeness but did not find one single aspect which was consistent only with a contract of employment.

 

Mutuality of obligation (MOO)

Once again, HMRC trotted out their simple definition of MOO, in that for each period of engagement there would have been an offer of work, an agreement to do that work and an agreement to pay for it.  

During the engagement period there were at least a couple of occasions when the computer servers broke down and the contractors were sent home, without pay, whereas employees remained in place and were remunerated. This demonstrated that JCB did not consider itself under any obligation to provide work or pay even after an offer had been made and accepted.

Marlen terminated the contract early when a better offer came up further enhancing the belief of both parties that the contract could be terminated at any time without any consequence.

The Tribunal came to only one conclusion: that the relationship between the parties was not one in which MOO was present.
 

Control

Mr Hughes worked as part of a team which consisted of both employees and contractors.  The Tribunal however did not believe this to be of any significance because not every team member has to have the same employment status. Whether team members perform similar or varied roles, it does not follow that simply because they are part of a team that their employment status has to be identical.

It was not therefore indicative that Mr Hughes had to be an employee merely because he was working in a team that included JCB staff. Furthermore, the Tribunal believed it did not matter that Mr Hughes was brought in to make up for a shortfall in numbers. What was important was the terms under which he was engaged.

Mr Hughes designed a part of a machine. Each engineer had a different way or working and the total machine design would be an assembly of the different pieces of work which came together at the end. JCB had to co-ordinate Mr Hughes' work to enable this 'coming together' and there would be time limits that both contractors and employees alike would have to adhere to.

This could only be achieved by a reasonably rigorous direction and supervision by senior management. In reality, however, the Tribunal believed that the degree of supervision and direction exercised over what Mr Hughes was doing was broadly similar to that being exercised over all the other contractors and senior employees simply because the nature of the project demanded it. It appeared that senior employed designers worked in a very similar way to Mr Hughes, i.e. being instructed what needed to be done and then left to use their skill and knowledge to design it.

The actual work itself could only be executed at JCB's site as it was the only practical place to carry out such work.

Although JCB laid down staff core working hours, Mr Hughes was subject to markedly less control than employees. No employee had the flexibility of working hours that Mr Hughes had. In practice he came and went virtually when he pleased, advising management out of courtesy.

Looking at the question of control as a whole, the Tribunal opined that Mr Hughes was not subject to the degree of control which would be necessary to constitute a contract of employment. The control to which he was subjected to was significantly less than that exercised over employees and demonstrated a clear distinction between the two.

This judgement, although not legally binding, may hopefully cause HMRC to re-examine its long held belief that contractors engaged simply to help out at a time of heavy workload must be employees. No, no, these contractors are simply more than bums on seats Mr Taxman!

2 Comments

  • A Contractor says:

    for each period of engagement there would have been an offer of work, an agreement to do that work and an agreement to pay for it.

    How is that MOO? That is a basic way to do business surely? This would cover everything from the way a global corporate would offer its services right down to the deal between the myself and old lady next door that waters my plants when I am away.

    This can’t be HMRC’s definition of MOO surely?

  • Andy says:

    Your disbelief has been my exasperation during the last couple of years whilst defending contractors in IR35 enquiries. Up until very recently the Tribunals & Courts had even been supporting HMRC’s very simplistic interpretation. It’s all there in black & white in the various judgements. What we do need is another court case to properly redefine MOO and thereby giving it legal substance.

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