Synaptek IR35 judgement - legal analysis
Judgement was handed down last Friday in the much-vaunted IR35 High Court case of Synaptek v IR, also known as the Stutchbury case.
Mr Stutchbury had originally been ruled to be within IR35 at the General Commissioners and had appealed to the High Court to contest this view. The Court found in favour of the Revenue, confirming the original ruling that IR35 did apply to the arrangements between Mr Stutchbury and his end client, EDS. The contractual arrangement was complicated by the fact that there was no direct contractual relationship between Mr Stutchbury's company Synaptek and EDS, as Synaptek's agreement to provide services was made with an agency, NESCO. EDS was itself providing services to the Benefits Agency at the Inland Revenue as successor to the Government IT Services Agency, which was the end client of Synaptek and NESCO during a previous period.
Mr Justice Hart emphasised throughout that it is not for him to decide the deemed employment status of Mr Stutchbury, merely to decide whether the General Commissioners had erred in law in their original decision. He has not therefore given any additional guidance as to the relative weight of the different status indicators, but it will be useful for contractors to be aware of some of the salient facts about the engagement. The Judge summarised the factors in this case that pointed to a "contract for services" (deemed self-employment) as follows:
- Synaptek/Mr Stutchbury was "in business on its own account". This was demonstrated by substantial investment in the company; a varied client base both historically and during the currency of the EDS engagement; Synaptek had in the past engaged a total of four to five employees.
Conversely, the Judge summarised the factors in this case that pointed to a "contract of services" (deemed employment) as follows:
- Minimum 37.5 hours per week required, broadly equivalent to a "normal working week".
It is interesting that, although mutuality of obligations was not stated as a specific factor for or against a contract for services, it was examined in the judgement. The particular clause in the agreement that had been relied on by Synaptek to exclude mutuality of obligation read as follows:
"6.4: In any event no payment will be made by NESCO to the Company in respect of any contractual period not actually worked including notice periods."
The Judge contested that the clause served merely to emphasise that payment is dependent on actual work having been done, and does not detract from a separate clause (4.3) requiring the agency (and through the 'hypothetical contract' requiring EDS) "to allocate work to the Company". The Judge also highlighted the often-misunderstood key distinction between mutuality of obligation during the currency of the contract, and mutuality of obligation between contracts. The Judge effectively considered that there must be an obligation on the agency/EDS to provide work during the currency of the contract, as otherwise the various termination provisions could serve no purpose.
The decision is a blow to many contractors who may believe that they are outside the scope of IR35 and once again highlights the importance of the actual arrangements being properly reflected in appropriate contract terms. The decision confirms the importance of properly drafted 'project-based' contracts as a means of legitimately avoiding IR35. It also counters advice given by some advisors that all that is required is for the contractor to be 'in business on his own account' - a theory effectively rejected by the Court. The underlying principle remains true that, given the complexities involved, the only security a contractor can gain is to have proper legal advice from the outset on how to operate, matched with a proper commercial agreement. There is no simple shortcut around IR35, and the current lure in some quarters for contractors to seek comfort from completing a simple question and answer form is simplistic and dangerous in the extreme.
This article was kindly provided by Lawspeed Ltd.
James May LLB Hons Manager, Contractor Services at Lawspeed Limited, experts in IR35, contract, recruitment and employment law. For advice on all aspects of contracts including commercial terms and IR35 status call 01273 236236 or visit lawspeed.com for further details.