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Last week, Shout99 reported the cases of Dragonfly Consulting and MKM Computing Services where one Special Commissioner ruled in favour of HM Revenue and Customs costing the two freelancers involved a total of nearly £130,000 in tax and NIC payments. (See: Two IR35 defeats cost contractors £130,000 - Shout99, Jan 2008).
This week, we look at the cases of Datagate Services and First World Software where the Special Commissioners decisions went in their favour saving them a combined tax and NIC demand for £110,000.
HMRC made a case that Datagate Services owed £46,255 in tax and NIC payments from 2001-2004.
Datagate Service
Bret Barnett is director and shareholder of Datagate Services Limited, a computer consultancy. He provided services through Technology Project Services (TPS) for end client MBDA. Employees of MBDA gave evidence in the case. Their former HR manager's evidence was deemed to be of a general nature relating to employment conditions and did not shed any particular light of Mr Barnett's individual circumstances.
In Datagate's contract with TPS, the Special Commissioner, Adrian Shipwright, drew attention to one clause which said:
"This Contract is a contract for the provision of Professional Consultancy Services; the relationship governed by this contract is neither that of agent-principal, nor that of the employer-employee. Any Consultants provided by you are and will remain employed by you; they are not employed by us, and during this Contract will not be employed by the Client. ...This Contract is not exclusive, and you and your Consultants are and remain at liberty to also provide services of third parties."
Another clause of the contract restricted the provision of services to the client other than through TPS for a period of six months. The Commissioner found that this was not a restriction of a type normally find in an employment contract.
Security
Security was a considerable factor in the arrangement. Work had to be carried out by a particular person because of security, although there was a right to provide substitute so long as suitable security clearance was obtained.
Mr Barnett could arrive and leave when he liked, though he tended to arrive after 0930 hours and leave before 1600 hours so as to suit his lifestyle. He could take time off when wanted to but out of courtesy discussed it with the team leader. He worked with the relevant team but was provided with discrete sections of work. MBDA wish to learn from him.
The Commissioner said: "I find that Mr Barnett's relationship with the MBDA team was that of a professional consultant providing independent services when looked at as a whole."
An employee
HMRC had argued that Mr Barnett was effectively an employee. They cited a number of reasons for their position: MBDA had a right of control; his obligations were those of an employee; the purchase orders were the contract; the documents show this was the equivalent of a contract of employment; he was treated in the same way as employee; the time he worked and the work was agreed with MBDA; he took part in a trip at MBDA's request; the HR document showed he was an employee; he wore a work badge; the pay rates were employee pay rates; there was a disciplinary procedure which was the same as the other employee; and he was integrated into MBDA's business because there were three in team producing an integrated product.
The Special Commissioner looked at the picture as a whole to determine if Mr Barnett was in business on his own account , bearing in mind that there is a strong security requirement in this case. He also referred to HMRC Manuals' draft letter setting out a list of relevant factors.
Right of control
Mr Shipwright concluded: "I do not consider that there was an ultimate right of control on the part of MBDA of the type the Manual implies. The engager MBDA could have continued with the engagement had it chosen to, or chosen not to renew the engagement. I do not consider here the position was one of an ultimate right of control as would be the case of an employee. Even if there were I do not consider in the particular circumstances that this would be of the same nature as for an employee. If there was an ultimate right of control this was because of the security requirements and not anything akin to that underemployment law. "
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- There was nothing in the documents requiring personal service.
- The documentation allowed for a substitute to be provided or help us engage.
- The equipment and materials were provided by MBDA but given the security context it would have been surprising had it been otherwise.
- The requirement that the worker has a real risk of financial loss is somewhat circular. If the worker is in business on his own account there must be a risk of financial loss. Here, he risked not being continued to be engaged.
- Mr Barnett was able to profit from sound management by organising his work effectively so as to save himself time and give himself more free time which he had told me was part of the reason that he organised his work in the way that he did.
- The basis of payment was a fee basis. This is entirely consistent with self employment. On the evidence, there was no employee type benefit such as sick pay or pensions provisions.
- There was no requirement that Mr Barnett work exclusively for MBDA.
- Whilst the position was that Mr Barnett was engaged in assisting MBDA's business, the Commissioner did not consider that he was "integrated" as an employee in the way that the Tort cases sometimes suggest. There was evidence that MBDA sought to give him specific projects which so far as possible which were self contained. The Commissioner found as a fact that Mr Barnett was not integrated into MBDA's business or organisation.
- The engagement could be terminated but the Commissioner did not regard this as being the equivalent of being able to give notice under a contract of employment.
- The Commissioner did not find that the number or continuation of employment gives rise to employment status.
Mr Shipwright said: "The intention of the parties seems to have been that there should be no employment. Why else would this structure have been set up? I find as a fact that the parties intention was that there should be no employment.
"Standing back and looking at the picture as a whole I find it a primary fact that Bret Barnett was in business on his own account and was not a person working as an employee in someone else's business on the hypothetical requirements that the legislation requires. He chose to do this through his company."
Full decision is available online here (Bailli).
Shout99 will review the other victory, First Word Software, tomorrow.
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Susie Hughes © Shout99 2008
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