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We conclude this series with a look at the case involving First Word Software Limited where HMRC argued that over £63,000 was owed in tax and NIC payments relating to 2000-2002.
The case was heard by Special Commissioner, Dr Nuala Brice, who has come to the fore of contractors' cases previously when she used her casting vote to give a controversial victory in the Section 660 Arctic Systems case in the Commissioners which set it on the road to the House of Lords and the subsequent 'income shifting' legislation. This time she found in favour of the freelancer in this IR35 case.
First Word Software
The the Appellant is Neill Atkins, a computer consultant, is the sole director and shareholder of First Word Software. From 2000 to 2002, First Word supplied Mr Atkins' Plexus Personnel who supplied them to Reuters Limited.
Employees of Reuters provided evidence to the Commissioners as to the nature of the working arrangements. Reuters has also provided a letter in 2003 answering a number of questions raised by the HMRC. However, many of the statements in the letter conflicted with the oral evidence of Mr Atkins and the Commissioner found that where there was conflict she preferred the evidence of Mr Atkins.
Working arrangements
Mr Atkins worked on Reuters' project relating to the migration of human resource and payroll systems. He attended at the London offices of Reuters where he was provided with a desk and a computer. He could be accessed by email at Reuters and was given a security identity card as a contractor so that he could access that part of the premises which contained his desk and also Reuters' computer systems. There was a team of about twenty people working on the project; some were employees but most were contractors. Mr Atkins described the whole of project as "a big jig saw" of which his task was a small piece.
There was no heirarchy and he sent weekly reports to a manager in Geneva. Mr Atkins said that all that the manager wanted to know was that 'it was happening'; otherwise he adopted a "hands-off" approach.
There was no agreement with Reuters about Mr Atkins' hours of work but he was expected to achieve the timescales and milestones relating to the project. He usually worked from 8-9am to about 4.15 and did not have to ask if he wanted to be absent for half a day. His weekly hours varied and he submitted weekly timesheets, as he charged at an agreed hourly rate.
He also used his own computer for work at home or during his train journey. He didn't invoice for these extra hours. He was identified as a contractor in Reuters' telephone directory and did not receive holiday pay, sick pay or any pension benefit. He was not given a copy of any staff handbook Unlike Reuters' employees he did not receive an annual salary nor receive any increase of pay each year after the annual review. Again, unlike the employees of Reuters, he did not receive a formal yearly appraisal. Insurance for professional indemnity, public liability and employer's liability was held by the First World.
Substitution
Mr Atkins had no official post or job title within the Reuters organisation and was free to work for other clients at the same time so long as he worked the hours needed to meet Reuters' requirements, although he did not work for anyone else during the relevant period.
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His contract with the agency provided that he could provide a substitute so long as Reuters were satisfied with the assignee. In practice there was no substitution. However, the Commissioner accepted the evidence of Mr Atkins that he could have assigned his work to a well-qualified contractor and he knew a number of contractors who would be able to pick up the work with a hand-over period of two or three days. She also accepted that Reuters' contract was with the agency and that they would wish to interview any replacement put forward by the agency.
The Commissioner ruled that: "Accordingly I find that, although Mr Atkins did in fact do the work personally, the intention of the parties was that the Appellant [First Word} could assign the obligations and benefits of its agreement with Plexus so long as the assignee was acceptable to Reuters. In other words, the intention of the parties was that Mr Atkins did not necessarily have to do the work personally."
Reuters confirmed that if the project had been terminated then Reuters would have terminated the arrangements with the Mr Atkins; Reuters did not find other work for contractors to do – "that was why they used contractors".
Another factor which was considered was that in 2002, Plexus became insolvent. While all First Word's invoices which had been sent to Plexus had been paid, two colleagues of Mr Atkins had not been paid and lost significant amounts.
Decision
In coming to her decision, the Commissioner considered a number of factors.
- Substitution: She found that the intention of the parties was that Mr Atkins was not obliged to perform the services personally. This pointed to the conclusion that Mr Atkins would not be regarded as an employee of Reuters.
- Control: Mr Atkins was engaged for his specific expertise and was engaged only for a particular project. He had freedom to choose his hours of work and used his own method of work. The Commissioner also noted he was free to work for others at the same time. It was found that 'The arrangements were consistent with the conclusion that Mr Atkins acted as a sub-contractor, with responsibility for part only of a larger project, and not as an employee'.
- Mutuality: It was noted that if, for any reason, Mr Atkins had been unable to work on the project, Reuters would not have to find him other work to do and would not have to pay him. Reuters were under no obligation to continue to make work available for the duration of the 2000 agreement.
- In business on his own account: Mr Atkins provided his own equipment for some of the work; he had invested in establishing his company; he had some financial risk of unpaid invoices and bad debts because Plexus became insolvent; he continued in business after the Reuters assignment; and he ran the risk of an insufficient number of engagements.
Volume of work done and other factors:He was paid an hourly rate which meant that some weeks he was paid less and some weeks more. His relationship with Reuters was not permanent and was always to terminate when the project was completed. He did not receive holiday pay, sick pay, or pension benefit, and did not get a weekly wages or an annual salary. Finally, he brought his own expertise and intellectual property rights to the project and retained ownership of them. He also retained ownership of the processes he devised for the purposes of the project.
Dr Brice concluded:"My decision on the issue for determination in the appeal is that, had the arrangements taken the form of a contract between Mr Atkins and Reuters, Mr Atkins would not be regarded as employed by, or as an employee of, Reuters."
Full decision is available online here (Bailli).
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Susie Hughes © Shout99 2008
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