Stutchbury IR35 case - Practical Advice for Contractors
Contractors have been bombarded with an avalanche of legalese as they attempt to get their heads around the implications of the Stutchbury ruling. But, what will it mean for them on a day to day basis. Andrew Leaitherland, a partner at DWF solicitors and a non-executive director of Brookson Ltd, the UK¡¦s leading composite company provider, offers some practical advice.
An individual's employment status should be relatively easy to determine. Lord Denning once referred to an employee being like an elephant - you know one when you see one!
Unfortunately, lawyers, accountants and the Inland Revenue have become quite good at disguising elephants or, more particularly, changing the tests to be applied to determine whether an elephant is actually an elephant!
The usual response to the question of whether an individual is caught by IR35 has been whether they are self-employed. The test that has been applied is that of whether the individual is "in business on their own account". This test of self-employment, despite being 13 years old and originating from a bricklayer case in Hong Kong, is still widely used today.
I would suggest that IR35 is, in reality, not a question of whether self-employment can be shown at a general level, but a question of whether an individual can demonstrate that they are not a disguised employee of the end client in relation to each particular assignment. The recent Stutchbury case (Synaptek Limited -v- Young (Inspector of Taxes) confirms this view. Stutchbury was recognised as genuinely being in business on his own account but was still found to have been caught by IR35 in relation to a specific assignment.
As such, in my view, the test that should be applied is more so one of employment status of the individual with regard to the particular assignment with the end client - which is slightly different from having to show that the individual is "in business on their own account".
The tests, which have been applied to individuals to determine employment status, have been many and varied. The schools of thought in this area over the last 30 years have revolved around the "contract test" and the "multiple test". The contract test focuses specifically on the terms of the contract between the end client and the contracting party. The contract test has been followed largely by the majority of cases we have seen over the last few years including Motorola -v- Davidson, Hewlett Packard.
My interpretation of the contract test is that it is too guarded - it does not take into account the full factual circumstances of the particular case and in the post-Sutchbury world it leaves contractors vulnerable to the IR35 net.
The recent Stutchbury case reverts us back to the multiple test which, in my view, is undoubtedly the right way to go. Effectively, we are being guided to look at the factual circumstances of each particular assignment, not just the contract, to determine employment status of individuals. Stutchbury in effect means we are back to asking the question: Is the contractor capable of being a disguised employee of the end client?
Consistently, the Courts have said that there is no one test to determine employment status - this has been reinforced by Stutchbury.
So, where should contractors start in determining employment status? The contract remains the first port of call. Any contract must be checked to ensure that there is:
- No mutuality of obligation. In other words, that the end client is under no obligation to offer the individual further work and the individual is under no obligation to accept any such work;
- Substitution provisions are contained. In simple terms this means that the contractor has the right to send a similarly qualified replacement to perform the services;
- The contract is not personalised. If the contract specifically states that only one named individual can perform it, it is much more indicative of an employment contract. If the contract simply identifies the services to be provided, particularly where there is a right of substitution, this is more indicative of a contract for services
However, an examination of the contract, under multiple test conditions which now appear to be back in favour post-Sutchbury, is not enough. Contractors also need to take into account the factual circumstances of each individual assignment. In short, they need to ensure that they are not treated on a day-by-day basis as the employee of the end client.
Contractors need to ask themselves a number of questions in order to determine employment status. Individually these questions will not lead to a definition of employment status, but collectively they may well lead to individual assignments being deemed to be non-IR35 compliant:
1. Do you always carry out work at your client¡¦s premises. If the answer is ¡§yes¡¨ this may tilt the balance towards non-compliance with IR35. However, the contractor may have perfectly valid reasons for attendance, such as security implications;
2. Does the client exert supervision and control over your work? If the answer is ¡§yes¡¨, again the balance is tilted. However, there may be a perfectly valid explanation, such as following particular technical specifications that can be taken into account in the final determination.
3. Does the end client restrict you from undertaking other work during the course of the engagement. Typical employment contract will contain ¡§exclusivity¡¨ clauses, which forbid opportunities to work elsewhere. Again, this would point towards employment status.
4. Does the client have the right to ask you to undertake tasks not detailed in the original terms of engagement? If the answer is yes we are again pointing towards employment status.
5. Does the client provide you with any benefits, such as sick pay, maternity pay or pension? This is a key area in determining an employment relationship. However, contractors must always bear in mind that an absence of benefits does not necessarily mean that you are self-employed.
6. Have you been given details of disciplinary procedures by the client? If the answer is ¡§yes¡¨ this would clearly indicate that you are employed.
7. Do you supply any of your own tools or equipment? If the answer is ¡§yes¡¨ this is a strong indicator of self employment.
8. How long is your engagement with the client for? Again, this is a very clear indicator. If the engagement is for an extended period of time or even indefinite, this is regarded as a typical evidence of an employment relationship.
9. Does the client have a right of dismissal? A self-employment contract would usually end on completion of the task or where terms of the original agreement have been reached. However, it must also be borne in mind that most contractual arrangements for either party include the ability to give notice of termination.
10. What was the original intention of the parties involved? It is not enough to simply call yourself self-employed. The Inland Revenue will often take into account whether either of the parties intended to deceive about employment status by disguising the fact.
The above are the main points contractors should take into account but others may also apply dependant upon the details of each engagement.
Many contractors, I am sure, will be reading this and thinking that they are now walking through a minefield post-Sutchbury. Determination of employment status was, and remains, highly subjective. However, Sutchbury has given you a roadmap ¡V the contract is not enough you must take into account other factors.
Contractors should also remember that help is out there from highly professional organisations and contractors should utilise it before they make potentially costly mistakes. Remember, at the end of the day, the most reliable test for establishing status has to be a mixture of what the contract states and what the factual circumstances of the particular assignment are.
Andrew Leaitherland is a partner with DWF solicitors and fulfils a Board role as a non¡Vexecutive director with Brookson .