Following on from the announcement in last week's newsletter that Phil Winfield, the sole director and shareholder of Primary Path Ltd, had won an eight year battle with HMRC, the full judgement has since been released and we examine the facts in more detail.
Primary Path's business is the provision of services in the field of database software development, and in particular the development of software for the Oracle database. Phil Winfield has a particular specialism in database software in relation to medical, pharmaceutical and healthcare sectors.
During the periods 4th June 2001 – 26th April 2002 and 26th November 2002 – 14th March 2003, Primary Path entered into a series of contracts with the agencies, Abraxas and Spring IT Personnel (Spring), respectively, to provide its services to GSK. The contracts via Abraxas was for the design and build of interface software to permit the web-based synchronising and joint operation of various medical dictionary and database systems created and used by GSK and also to synchronise GSK's dictionaries with certain external industry-wide specialist dictionary and database systems. The project required close liaison between GSK and a US company, Galt Associates.
The work carried out under the Spring contracts was less specialised and was reflected in a lower hourly rate of pay. This required the development of interface software for synchronisation with the Oracle database system and was the initial stage of a larger programme being undertaken within GSK for implementing new systems.
Following a number of years of IR35 enquiry, HMRC issued tax and NIC assessments, in October 2007, for the two years ended 5th April 2003, totalling just over £25K. These were appealed by the contractor but a further four years produced no agreement on the IR35 treatment and the case was therefore heard by the First Tier Tax Tribunal in April of this year. Mr Winfield gave evidence at the hearing and, for HMRC, a Mr Lamming appeared as a witness. Mr Lamming had worked as a IT/business consultant for GSK for 20 years and during the period April 2001 – August 2002 he was the project manager responsible for a team of 10 workers. That team was a mix of GSK employees and independent contractors of which, Mr Winfield was one of their number.
GSK required the services of contractors to add particular skills to its existing workforce and to give flexibility in staffing projects. Contractors were usually hired for the short term and for a particular project.
The upper level contracts between GSK and Abraxas were entitled 'IT Agency Staff Agreement' and the contracts between GSK and Spring was for the provision of 'Contingent Workers'. The Tribunal found that these contractual arrangements generally corresponded with one another so it was not necessary to set out the details of both contracts preferring to rely on the Abraxas clauses and highlight any significant differences. The main features of the Abraxas contract were:
- GSK would monitor a contractors performance and approve weekly timesheets;
- GSK would allow a contractor to take holiday or time off to attend training courses provided they received 10 days notice and that such absence did not affect or delay the project;
- It was possible to offer a substitute provided that the replacement worker met the agreed specification and was accepted by GSK;
- GSK required the agency to ensure that their agreement with the contractor reflected the terms contained within the upper level contract, in particular the right of substitution; and
- A contractor was permitted to carry out work for other clients simultaneously provided it did not compromise GSK's projects
The lower level contract between Abraxas and Primary Path contained the following principle provisions:
- Mr Winfield was referred to as the 'Nominated Individual' but was able to send a replacement provided the substitute possessed the necessary skills and expertise;
- Fees were by reference to an hourly rate and when submitting its invoice, Primary Path was required to provide a progress report on the project;
- The 'Works Schedule' included a “work pattern” which was a standard commitment of 37 ½ hours per work or such other times as may be agreed with GSK; and
- Termination of the contract could be made by Abraxas on 4 weeks notice or without notice in certain specified “default” circumstances.
Before Primary Path was engaged Mr Winfield held discussions with GSK personnel to discuss the nature of the services required and the scope and extent of the project, Mr Winfield's skills, his experience in the relevant fields, and his availability for the project and the required visits to the US.
Mr Winfield brought a unique set of skills to the project team that GSK were lacking. Those skills were required specifically and only for the project in question. Primary Path was given a broad remit for completing its part of the project but was required to work within a timeframe that was part of a timetable for completion of the project. It was left to Primary Path to determine how to carry out and manage its part of the project and Phil Winfield discussed matters with the project manager and reported to the wider project team at progress meetings to ensure consistency in delivery of the project as a whole. The initial and critical part of the work was the preparation by Primary Path of a design document detailing its plan for the design and build of the specialist interface software. Although the document required approval of a business analyst, GSK had little input in its preparation. Throughout the project Phil Winfield had little involvement with GSK employees in respect of technical aspects of the work, it was necessary for his work to be checked against the standards, quality requirements and conduct of the project as laid down by GSK.
Whilst there was an expectation for Mr Winfield to be available during “core hours” he could determine his own working time. Any additional hours worked, however, would require the approval of GSK due to them having budgeted for a stipulated number of hours worked. Although he normally worked at the clients' premises he could work from home provided the requirements of the project did not necessitate him being present at GSK's premises. He was provided with a GSK laptop to enable him to connect to GSK's network but he could copy information onto his own laptop to enable him to work on the project at home.
Phil Winfield was required to make a business trip to the US for the purposes of the project. All travel, accommodation and other arrangements were made on his behalf by GSK and at their cost.
The second project saw Phil Winfield working with a different team within GSK and he worked with one other contractor on discrete tasks. There was limited interaction with the project co-ordinator and the rest of the GSK team as to the technical aspects of the work.
Mr Winfield was entitled to use the GSK canteen and staff car parking facilities.
During the course of the first project Phil Winfield developed a relationship with Galt Associates, a party involved in the GSK project. Primary Path carried out some work on a speculative basis whilst simultaneously providing its services to GSK. As a result of this further fee paying work was secured between the two GSK assignments and into the second project. The work for Galt Associates was carried out from home. Work for this client was to prove a significant factor in the Tribunal reaching its decision.
The Tribunal ultimately concluded that the engagement was that of an independent and self-employed contractor providing services to a contractor for the following reasons:
Mutuality of obligation (MOO)
The essence of the arrangement between the parties was that Primary Path was only paid for the hours worked and should, at any time, there have been a break in the project, the Tribunal could not see that there was any contractual basis for demanding other work or payment in the interim period. There was nothing to suggest that GSK were of the mind to offer work beyond the specific project for which Primary Path was engaged. This feature was indicative of self-employment.
Basis of Payment
HMRC argued that a worker in receipt of an hourly rate of pay was an indication of employment as an independent contractor customarily charges a specified fee for a particular task. The Tribunal disagreed, as for a highly skilled specialist such as Mr Winfield they would expect an employment contract to remunerate him on a specified salary pro rated for each month. Within the context of professional skills, hourly rates of pay are a feature of present business world and, in this case, the basis of payment pointed away from a contract of employment.
Right of Substitution
The Tribunal stated that no employment contract envisages that an employee will send along a replacement worker in their place and therefore any contract that has at least some recognition that the provider of the services can supply a substitute in certain circumstances must seriously be considered as being a contract other than for employment.
Phil Winfield gave instances of other engagements he had undertaken where he had provided a substitute and where he had substituted for another contractor, which the Tribunal accepted as being some indication that the practice can be a feature of the industry within which he works. The contractual substitution clauses were, however, not regarded as being determinative and in the process of weighing up all the factors was only considered to tilt the balance away from employment.
Control
It was considered that Mr Winfield was only subject to minimum supervision by GSK as he was hired for his expertise for a particular project. The supervision and direction he was subject to was therefore only that necessary for the purposes of the management of the project as, in the main he was left to his own devices. The level of control and supervision exercised did not go beyond that which one would expect in the hiring of an independent contractor.
Business on Own Account
The evidence set before the Tribunal was compelling and conclusive.
Primary Path actively sought work by promoting itself through its website and by monitoring the websites of those who may have been seeking the company's expertise. In addition the speculative work for Galt Associates that yielded a further lengthy engagement proved that the contractor was operating a genuine business.
This was another bloody nose for HMRC, who have lost out in a number of IR35 appeals recently. It is encouraging that MOO is being interpreted with some common sense at last rather than lending credence to HMRC's simplistic and absurd definition. After a number of years in the shadows, the business on own account test is starting to take on significance once again.
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