IT consultant wins IR35 appeal

[dkennedy1001]

An emploment lawyer friend tells me this is good news for contractors...

IT consultant wins IR35 appeal

The First-tier Tribunal has allowed a consultant's IR35 appeal notwithstanding the requirement to provide personal service, the absence of any practical right to provide a substitute and other factors that clearly pointed to employment (such as the vesting of intellectual property rights in the end client).
The decision is helpful because it shows the factors that point to employment, those that point to self-employment and those that, depending on the circumstances, could point either way. However, as with all IR35 cases, it needs to be viewed with caution because the outcome of any case depends entirely on its own facts. This makes it extremely difficult to ascertain a clear set of principles that can be translated into firm advice for clients when advising on consultancy arrangements.
The decision also highlights the relative weight that a tribunal may attach to the various contracts in a tripartite agreement. The tribunal attached much less significance to the contract between the personal service company and the agent than to the agreement between the agent and the end client. (MBF Design Services Ltd v HMRC [2011] UKFTT 35.)

[kaiser78]

An emploment lawyer friend tells me this is good news for contractors...

IT consultant wins IR35 appeal

The First-tier Tribunal has allowed a consultant's IR35 appeal notwithstanding the requirement to provide personal service, the absence of any practical right to provide a substitute and other factors that clearly pointed to employment (such as the vesting of intellectual property rights in the end client).
The decision is helpful because it shows the factors that point to employment, those that point to self-employment and those that, depending on the circumstances, could point either way. However, as with all IR35 cases, it needs to be viewed with caution because the outcome of any case depends entirely on its own facts. This makes it extremely difficult to ascertain a clear set of principles that can be translated into firm advice for clients when advising on consultancy arrangements.
The decision also highlights the relative weight that a tribunal may attach to the various contracts in a tripartite agreement. The tribunal attached much less significance to the contract between the personal service company and the agent than to the agreement between the agent and the end client. (MBF Design Services Ltd v HMRC [2011] UKFTT 35.)

Do you know why they were being investigated in the first place ?

[dkennedy1001]

Bit more info

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Background
The IR35 rules were introduced to prevent individuals avoiding income tax and national insurance contributions (NICs) by providing their services through an intermediary, most commonly, a personal service company. The IR35 rules allow HMRC to ignore the legal relationships between the parties and instead determine the tax treatment by considering whether, had the services been provided under a contract made between the worker and the client directly, the worker would have been regarded as employed by the client for income tax and NICs purposes (see, Chapter 8, Part 2, Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000/727) (the Regulations)). If the worker would have been so regarded, income tax and NICs must be deducted by the intermediary under the PAYE system. For a detailed review of the IR35 legislation, see Practice note, IR35 (PLC - IR35).



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Facts
· The IT consultant (consultant) was the sole director of a personal service company (appellant).

· The appellant entered into an agreement with an agency (GED) to provide the services of the consultant to the end client, Airbus (first level agreement). The key terms of the agreement were:

o a 7-day notice period;

o a requirement that the appellant rectify defective work;

o vesting of all intellectual property rights created in Airbus;

o no obligation to provide any particular "operative" (undefined);

o exclusion of all statutory or common law employment rights; and

o a requirement for GED "and the personnel" (another undefined phrase) to have insurance against public, employer's and professional indemnity risks of £250,000.

· GED entered into an agreement with another agency, Morson, to provide unnamed "operatives" to Morson to provide to Airbus (second level agreement). The agreement contained the same key terms as above (save that the requirement for GED to carry insurance was excluded). In addition, the agreement provided that:

o neither Morson nor Airbus was entitled to seek to exercise supervision, direction or control over GED or the operatives; and

o the relationship of employer and employee between any of the parties was expressly excluded.

· Morson entered into a contract with Airbus (Morson-Airbus contract) to provide Airbus with the services of a number of named "operatives", including the consultant. Two example contracts were produced to the First-tier Tribunal (tribunal) in evidence. The first provided for the purchase of a total number of hours and the hourly rate. There was no obligation on Airbus to offer a particular amount of work to an operative. In the second agreement, a set number of hours was allocated to the consultant. Both agreements provided that they could be terminated by Airbus without notice (in which case, Airbus would pay a fair and reasonable price for the work to date), Morson had to remedy any breaches within 28 days at its expense and that Morson had to carry legal liability insurance. In addition, operatives were required to comply with time recording procedures and work was subject to certain quality standards.

· The consultant carried out the services personally. He worked as part of a team and worked on particular aspects of a project allocated to him. The consultant worked mostly on site and worked, on average, a 40-hour week. He was not subject to Airbus' disciplinary or grievance procedures. He was not invited to "employee" events.

· The consultant's work was not supervised as such, although his work was checked to ensure conformity with technical protocols and quality standards and to ensure that it harmonised with the rest of the project. If his work was technically at fault, it would be for the consultant to correct it at his own expense. If the consultant was unable to work due to technical problems at Airbus, he would stop work and would not get paid. Employees of Airbus, in contrast, would find alternative work and would continue to be paid. The consultant paid for some of his own training but was also trained by Airbus at its expense.

HMRC claimed that the IR35 legislation applied to the appellant whereas the appellant argued that the consultant was self-employed. The appellant appealed to the tribunal.



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Decision
The tribunal allowed the appeal.

In determining the nature of the hypothetical contract between Airbus and the consultant, the tribunal first considered the contractual terms. It focused on the Morson-Airbus contract on the basis that the first and second level agreements were "quite explicitly contracts for services" (although they also contained provisions that pointed to employment). The tribunal considered that the following factors from the Morson-Airbus contract pointed to self-employment:

· The absence of mutuality of obligation. Airbus was not required to provide the consultant with work and if the consultant could not work for technical reasons outside his control, he would not be paid. The tribunal noted that in the first example of the Morson-Airbus agreement, there was no specific allocation of hours to the consultant. While there was a specific allocation in the second example, the tribunal considered that this was simply an accounting mechanism needed to reflect the different rates of hourly pay.

· Airbus's right to cancel the contract without notice together with the right to agree a just and reasonable payment.

· The "fundamental insecurity" of the position: the consultant had neither a specified role nor a particular line of duty.

· The requirement to remedy breaches.

The tribunal considered that the following factors from the Morson-Airbus contract pointed to employment, but determined that these factors had less weight and could be explained by the "special needs of a very complex and commercially sensitive undertaking":

· The selection of named individuals suggested that personal service was required.

· Payment by the hour and time recording.

· Quality standard approvals.

· On site working.

· The vesting of all intellectual property rights in Airbus.

The tribunal then considered whether any different conclusion should be drawn in light of how the contracts were operated in practice. The tribunal considered that the following factors could point to either employment or self-employment but considered for the reasons briefly stated that they pointed to self-employment:

· The negotiation of remuneration at various stages. The tribunal noted that both employees and the self-employed negotiate their remuneration, but that employees may try to improve their remuneration by seeking a promotion or re-grading. There was no evidence that the consultant took such an approach.

· The absence of any prospect of the consultant actually sending a substitute. This was not unusual in the context of a professional man whose personal expertise was valued.

· The degree of checking and approval of designs. While the consultant and employees of Airbus were subject to the same degree of checking and approval of designs, the consultant was not subject to disciplinary or grievance procedures, had to rectify his own mistakes, and his contract could be terminated without notice.

· On site working, using Airbus's equipment, work allocation and co-ordination by the permanent team leaders.In this context, there was no other sensible way of organising the project.

· The broad similarity of working hours from one week to the next. The tribunal accepted that the consultant's working patterns (n particular, his start and end times, over which he had significant control) were not typical of normal employee working habits.



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Comment
This case is helpful because it shows the factors that point to employment, those that point to self-employment and those that, depending on the circumstances, could point either way. However, as with all IR35 cases, it needs to be viewed with some caution because the outcome of any case depends entirely on its own facts. This highlights the difficulty of applying and advising on the IR35 legislation in practice. It shows that while the indicia of employment are easy to explain, their scope and the weight to be attached to each is much more illusive. This makes it extremely difficult to ascertain a clear set of principles that can be translated into firm advice for clients when advising on consultancy arrangements.

Although the tribunal considered mutuality of obligation in the context of the contractual arrangements, it did not expressly consider it in the context of what happened in practice. This is unfortunate because HMRC had argued that, notwithstanding the contractual terms, mutuality of obligation was present because work was always available and the consultant was always paid for it. HMRC's argument clearly widens the scope of the mutuality indicator and it would have been helpful for it to have been addressed.