IT contractor JLJ in first ever 'split IR35 case'
An IT contractor has been handed an unprecedented yet unenviable verdict of both outside and inside IR35 at a single workplace - meaning he wasn't but then was a 'disguised employee', despite trading as a limited company for nearly two decades.
In ruling that John Spencer was outside IR35 for the first three years of a contract - though not the four subsequent years, a Bristol Tax Tribunal made the UNIX expert with a 17-year trading history the subject of IR35's first ever "split case".
"This is unprecedented as far as I'm aware," Paul Mason of Abbey Tax reflected to CUK yesterday. "I've not heard of a case like this because normally your status is your status; you're either one thing or the other but not both.
"However I can see sense in what the judge said [to Mr Spencer]: 'Up to a point you were doing specific bits of work and projects, after that point you were really no different to being a permanent employee.'"
Employment status advisor Kate Cottrell, seconded to the Office of Tax Simplification for the IR35 review, agrees. "This case is indeed the first time we have ever had a split", the Bauer & Cottrell co-founder told CUK.
"It clearly highlights the need to consider IR35 for each and every contract, [at both] extension and renewal. I know of similar scenarios where there was an original project and then the same contractor was offered another role to cover for maternity leave.
"So our opinion [of that worker's employment status] was originally outside IR35, but the subsequent change [to their working reality] put them inside IR35, for that particular contract."
In Mr Spencer's case, lodged as an appeal to HMRC's demand that he pay £140,000 under IR35, the "precise point" at which the change in his employment status occurred "is not easy to define."
However the judgement adds, "at the end of December 2003 there were various indications that the relationship did then change," Judge Howard Nolan said, addressing Mr Spencer, his limited company JLJ Services Ltd and the end-user, Allianz.
"Our decision is accordingly that in the early period, prior to the end of 2003, Mr Spencer would not have been regarded as an employee, but that from the start of 2004 onwards, he would have been regarded as an employee."
Positively, then, for Mr Spencer - as he approaches his 67th birthday, his seven-year liability under IR35, as alleged by HMRC, has been almost cut in half by the tribunal, prompting claims he snatched a 'partial' victory.
"[Generally speaking] I always think that the strongest argument against IR35 is Control," Mr Mason at Abbey Tax said. "This is simply because that's where you can really show that you are an independent [business].
"Indeed, the argument [that Mr Spencer won] for the earlier part of the contract was that it was for labour on discreet pieces of work; where he had more control."
The judgement is supportive. When at the workplace (Allianz's premises), JLJ's owner-manager did not 'clock in' as the organisation's employees were required to. Plus, there was "little intervention with the day-to-day work that Mr Spencer would then be doing."
Handed down in October, the judgement adds: "Obviously Allianz would enquire about progress, particularly if a project was over-running the expected period assigned for completion of the project.
"Furthermore, Allianz also said that it had the right, if some emergency arose, to require Mr Spencer to pause in work on a particular project if some other matter needed to be attended to first."
Another Control issue - whether Mr Spencer's work was subject to a 'quality control' process, did not prove to be a determining factor, partly owing to conflicting evidence from the worker and the client.
"Understandable" sympathised the judge but still, "nobody in the company [Allianz] would have had the detailed knowledge of Mr Spencer's field of expertise to judge whether in every respect he was tackling his projects in the best way."
Such a lack of control is "fine" when the worker is providing expert services (judgement point 23) - on a unique project (point 42), but not, explains Ms Cottrell, when "the engager needs work undertaken repeatedly, and when you are working generally within the organisation."
Given that the classic tests of employment status have not changed, and therefore remain as significantly determining as they were before the case, the advisor believes such a work pattern is the "main" warning contractors should heed.
Mr Mason agreed: "For a contractor, the central message being sent by the courts is that if you're going to engage over a long period, then you really need to be able to show that you're engaged on specific projects.
"[To be outside IR35 you can't] just basically get on with whatever work crops up [from the end-user]. Do that and you risk ending up becoming very much part and parcel of their organisation.
"So if you're not doing separately identifiable and discreet projects, then it's very easy over an extensive period to be perceived as part of the client's furniture. That's what happened here and to my mind, that's Mutuality of Obligation."
This personal distinction is necessary because the judge, who had not previously heard an IR35 case, said MOO, or 'mutuality of undertakings' as he called it, had "diminished importance" as one of the classic tests.
Language in the judgement, pertaining to the second part of Mr Spencer's duration at Allianz - the IR35-caught part, suggests otherwise.
"At the end of 2003, if not before, it became clear that Allianz wanted Mr Spencer's services permanently. It no longer engaged him for projects. It either offered him employment, or permanent engagement, and even if he rejected that, he was thereafter engaged on an annual basis," it says.
"In other words he became one of Allianz's key computer experts, available for work that was likely to be available indefinitely. He certainly ceased to be engaged just for identified projects.
"By breaking the link with projects, and indicating that Mr Spencer would work generally within the organisation, we consider that from 2004 onwards, there was more reality to Control."
Abbey Tax reflected: "From that moment onwards - the inside-IR35 period, to us the judge is effectively saying there was mutuality."
Two other tests run by the court, the right of Substitution and Undertaking 'one's own business,' found insufficient evidence to back Mr Spencer's claim that he was a independent contractor for his entire seven-year stint at Allianz, not just the initial three years.
That's despite him enjoying no pension, holiday or sick leave rights during his Allianz contract, sourced by recruitment firm Highams. He had no company car and although he did join an Allianz workers' car pool, he never drove.
Affectionately referred to the judge as likely to be "one of the early computer specialists" in the UK, the now-retired programmer was not reimbursed for his business travel costs, and even had to pay for his own Christmas lunch.
Asked this morning about the judgement, Brookson, a tax advisor to contractors, told CUK that it shows "clearly IR35 is alive" and "must be considered by all contractors on all assignments they undertake for the whole duration."
Managing director Martin Hesketh added: "Undertaking an IR35 review of your contract at the outset of an assignment is vital. However we also believe it doesn’t end there, as this case proved."