Courts aren’t at odds over right of substitution

'Personal service' is an important factor in determining whether various pieces of tax legislation apply, including IR35 and Sections 44-47 of the Income Tax (Earnings and Pensions) Act. But two recent cases appear to highlight a possible conflict in approach, writes Adrian Marlow, founder of recruitment law firm Lawspeed.

HMRC v Talentcore (2011)

This case concerns the Agency Worker Tax Rules (sections 44-77 ITEPA). Individuals were supplied to cosmetic companies for counter and promotional work at airport duty-free shops.

HMRC claimed that payments to the individuals should have been treated by the agency as employment income, with appropriate tax and NI contributions made. HMRC argued that the individuals worked under the supervision, direction or control of the hirer and were personally obliged to provide work or services.

There were no formal written contracts in place between Talentcore and its clients or Talentcore and the individuals, but it was accepted in evidence that individuals who were unable or unwilling to complete their agreed shifts were expected to provide a substitute. This right of substitution played a key part in leading the agency to victory.

The Upper Tier Tribunal accepted that although there was the possibility of an element of supervision, direction or control, there was no obligation on the workers to provide personal services. The workers’ basic obligation was to ensure that the shift they accepted was covered, either by the workers themselves or a substitute. The consultants did not therefore fall within the scope of the Agency Worker Tax Rules and payments did not have to be subject to a deduction of PAYE tax and NICs.

2) JLJ Services Limited v HMRC (2011)

For IR35 purposes, this case also depended partly on whether a personal service was performed. Here, the substitution clause in the worker’s contract was discounted, having ‘virtually no bearing’ on the decision.

How is it that the importance of this element can vary so drastically?

The answer, it would appear, is that in such cases the judge will be discerning. After all, covering your body with feathers does not make you a chicken, particularly not in a court of law.

A substitution clause is of no use whatsoever if no substitute is ever offered, nor is likely to be. Such was true in the JLJ Services case where the end-client was interested in the qualifications and suitability of the worker himself and no substitute was ever offered in seven years of work. This led the judge to describe the substitution clause as ‘basically irrelevant “window-dressing”’.  

Although we have what initially appears to be two differing court interpretations, in reality the principle is clear that in determining whether there exists a personal service obligation, the courts will look at all aspects of the worker’s relationship with the client and it is the existence of an actual right to substitute in practice, rather than a clause in a contract, that will be significant. There is therefore, despite the appearance of one, no conflict in approach in how the courts are interpreting the right of substitution.

Editor's Note: Further Reading on the Talentcore case -

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Monday 13th February 2012