Another IR35 loss at the Commissioners

The Inland Revenue have won again, in the IR35 case of Future On Line Ltd. The case was handled by JSA Accountants, and not for a change the PCG and Accountax.

The case involved freelancer Mr Shane Roberts, an IT contractor, his company Future On Line Ltd and a contract it had with EDS, via an agency Elan. This was meant to be a three-month contract starting in July 2000 but it eventually ran for three years following a number of extensions.

The contract entered into with Elan did not appear to be particularly IR35 "friendly". There was no valid substitution clause (the client had to give written permission), there was a fixed notice period, and what would seem to be a large degree of control over Mr Roberts. Very similar to the recent Usetech case in which the Revenue also won.

The Commissioner heard that in the course of the project Mr Roberts assembled a team to carry out the necessary testing and personally interviewed some 160 staff. Mr Roberts shared his expertise with those members of the team and made himself available to advise and assist them when they met technical problems. He allocated work between team members and ensured that the team as a whole met its objectives.

The project was under the overall management of the chief executive. In his capacity as system test team leader Mr Roberts' project line manager was the test manager. Mr Roberts had work allocated to him and his team following discussion with the EDS project line manager. The Commissioner notes in his judgement that "At all times Mr Roberts was deputy to the test manager."

Mr Roberts, in his test management role, attended weekly meetings with the client to report on progress and each night at 9.00pm and every morning at 8.00am Mr Roberts reported to the EDS programme manager on the work done by the test team.

The Judgement

The Commissioner's first conclusion was that neither Mr Roberts nor his Company had any right to substitute someone to take his place. All Mr Roberts could do was to offer a substitute, but EDS was not obliged to accept.

He goes on:

"The work was carried out at Longbenton and Washington because that was where EDS required it to be performed; a small amount of work may have been carried out at Mr Roberts' home through remote access. Mr Roberts had a large measure of control over how he conducted the testing procedure; but there was a test manager with overall direction and with responsibility for testing procedures. And work was allocated to Mr Roberts and his team following discussion with the EDS line manager."

"In law, though not actually in practice, the purchase order required Mr Roberts to carry out work in accordance with instructions. The FOL/Elan agreement specified 37.5 hours each week as the standard hours and in law, though again not in practice, Mr Roberts required permission from EDS before working more hours in a week. Also relevant is the fact that Mr Roberts was required, under the FOL/Elan agreement, to adhere to EDS's rules and regulations."

"Entitlement to payment for Mr Roberts' services was comprehensively covered by the FOL/Elan agreement. There was a fixed entitlement to an hourly rate for 37.5 hours a week: and payment for excess hours under the terms of the agreement, which were never changed despite the fact that Mr Roberts habitually worked excess hours without approval, depended on the prior approval of EDS."

"Save for his laptop (which most individuals with qualifications similar to those of Mr Roberts possess) Mr Roberts provided no capital equipment for the work that EDS required him to perform. Mr Roberts referred to PI indemnity cover being held by FOL. I had no further details of this."

"He was accountable to a line manager. He was directly involved in recruiting and managing the members of his team."

The representative of Mr Roberts tried to argue that there was no control in an employer/employee sense by EDS of Mr Roberts' activities. He argued that Mr Roberts had been engaged by EDS at the time when it had the challenge of putting in place a system in a much shorter period that would normally have been required and that Mr Roberts was given a wide remit and not tied down by instructions or rules. He was the expert and he wrote the templates.

The Commissioner dismissed this view as follows:

"While I fully recognize the exceptional experience and essential functions performed by Mr Roberts in the CSR project, I also have to recognize that there were constraints, legal and practical, governing Mr Roberts' work at the sites. I have identified certain arrangements in the previous paragraphs which show that, in essence, EDS controlled Mr Roberts in his work. EDS was able, on a continuing basis, to direct when and where the work was to be done; and, while I accept that Mr Roberts' work involved an especially high level of skill and independence of judgment, EDS were through their organizational structure able to control how the work was to be done. Mr Roberts' position was deputy to the test manager; he continued in this position full-time for nearly three years. Throughout that period the position was integrated into EDS's overall structure set up to carry out the project. Looking at the matter with the question of whether Mr Roberts was subject to EDS's control to a sufficient degree to make EDS Mr Roberts' "master", I have to conclude that, had there been a contract between EDS and Mr Roberts, Mr Roberts would have been employed rather than in business on his own account."

He also tried to argue that the actual obligations between EDS and Mr Roberts were so limited as to fall short of the "irreducible minimum of obligation on each side" required to create a contract of service, ie the much talked about Mutuality of Obligations (MOO)

On this issue the Commissioner noted that:

"Here it will be recalled that the services of Mr Roberts were engaged by EDS through FOL as intermediary and Elan as agent for a three month period which, in pursuance of the purchase order mechanism in the Elan/EDS agreement, were extended to cover the 153 weeks to the end of March 2002. The arrangement could be terminated by EDS by allowing the period covered by the purchase order in question to run its course without being renewed or on giving four weeks' notice. Until termination by EDS therefore there was an obligation on EDS to provide paid work at a place of work and a corresponding obligation to EDS for the provision of Mr Roberts' services coupled with Mr Roberts' obligation to conform with EDS's rules and working practices including the requirement to submit timesheets. It seems to me on that basis that the mutual obligations that actually existed between Mr Roberts and EDS were well above the irreducible minimum. Had there been a contract directly between EDS and Mr Roberts its mutual obligations would have been such as to establish an employer/employee relationship."

So, what now? Should we all run for cover (or at least take out IR35 insurance)? Well, from the facts reported this case actually seemed quite poor, there was no right of substitution, a great deal of control, a fixed notice period and Mr Roberts had become part and parcel of EDS.

What has been useful in this case is the way in which yet again the Commissioners have highlighted the same few points as being the ones to look out for when accepting a new contract.


Thursday 13th May 2004
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