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Special Commissioner Charles Hellier, who ruled on both cases which were wins for HMRC found that contractors, Dragonfly Consulting Ltd and MKM Computing Ltd, had become part of the team and integrated into their client companies.
Increasingly its seems that HMRC and the Commissioners are looking beyond the terms of the contract - even back-to-back contracts - and examining the working practises of the arrangement as seen through the eyes of the client.
In some cases, where the contract has included ' the right of substitution', the client has refuted this would have been the case in practical terms. Some of these cases date back several years.
Working Practices
Carl Whittaker from Qdos Consulting said: "On reviewing recent cases decided, it is clear that the evidence of the end user clients should be carefully examined before a case is taken to appeal. You should also try to anticipate how the end user will represent his views of the working practices, including substitution and control, under cross examination before the Commissioners.
"Whilst the contracts may be fine and true contracts FOR services exist, HMRC will still consider the views of the end users regarding the day to day working practices. They will contend that whilst a contract for services existed the working practices as confirmed by the end user may indicate that actually the arrangements were those of a contract of service.
"It is clear that where the contractor and his end user client differ on the main status issues it is likely that the Commissioners will give more weight to the evidence given by the end user as they have the final say on whether they would accept that there is an unfettered right to substitution and also the level of control exercised.
"If it is the case that the end users are not completely on the side of the contractor and do not agree totally with the contractors views on substitution/control etc then it would be advisable to attempt a without prejudice compromise or concede. Of course when making the decision whether or not to take an IR35 dispute to appeal you must take into account the amount of duty at stake, the prospects off success, the costs of appeal and the contractor’s view to risk."
Commissioners
Dragonfly Consulting Ltd
Jon Bessell was the director of, and owner of 50 per cent of the shares of Dragonfly Consulting Ltd. Operating through an agency, he provided his services from April 2000 to January 2003 to the AA as an IT system tester.
He provided his own training, provided some of this own equipment, including his own chair to assist with back problems, had another smaller client, did not receive sick pay from his client and had a different entry pass to employees.
Employees of AA gave evidence as to the nature of the working arrangements. Though substitutes had been used in the past (by others) and there was a letter to Mr Bessell saying that the Appellant (Mr Bessell"will vet and supply a suitable substitute for the assigned consultant. [The Appellant] will manage the selection process with input from the assigned consultant. Any training costs … would be … at [the Appellant's] expense.", other members of staff confirmed that AA would wish to vet a substitute and would be 'unhappy' if a substitute turned up unannounced and unforeshadowed.
The Commissioner agreed that the 'very limited right of substitution is not inconsistent with employment and does not point strongly away from it'.
Special Commissioner, Charles Hellier concluded:"Overall I find nothing which points strongly to the conclusion that Mr Bessell would have been in business on his own account; by contrast when I stand back and look at the overall picture I see someone who worked fairly regular hours during each engagement, who worked on parts of a project which were allocated to him as part of the AA's teams, who was integrated into the AA's business, and who had a role similar to that of a professional employee. Mr Bessell did not get paid for, or go to work to provide, a specific product; instead he provided his services to the AA to be used by them in testing the parts of a project which from time to time were allocated to him. He was engaged in relation to the work to be done on a specific project but not to deliver anything other than his services in providing testing in relation to that project. In my opinion he would have been an employee had he been directly engaged by the AA."
The outstanding PAYE and NI amounted to £99,000.
Full decision is available online: here (Bailii).
MKM Computing Ltd
Martin Ellwood is the sole director of, and owner of 50 per cent of the shares of MKM Computing Ltd ("MKM"). Operating through an agency, he began a contract with London General Holdings Ltd ("LGL") as a contract analyst programmer from 1998 to 2002.
Mr Ellwood has a right of substitution in his contract: "[MKM] has the right to provide a substitution worker in addition to or in place of Martin Ellwood. If a substitute worker were to be proposed [MKM] would be required to satisfy [LGL] that the substitute has the necessary skills, qualifications and experience …", which was never exercised during his time at the client's site.
Special Commissioner, Charles Hellier placed considerable emphasis on the 'notional contract'. He concluded: "The parties' intention as to whether there should be an employment relationship are clearly irrelevant. Their intention in relation to specific circumstances was in my view relevant to the consideration of the notional contract on the what-would-it-contain basis and has been considered elsewhere.
"I had the impression that while he was working at LGL Mr Ellwood was part and parcel of the organisation. I accept that he was recognised as a contractor rather than as a permanent member of staff, but he sat alongside other members of staff discussed future projects, and was called upon for help in emergencies and worked along with them on the projects as would a permanent employee.
"Standing back and looking at the whole picture I am left with the distinct impression that under the notional contract Mr Ellwood would have been an employee. He would have been providing his own work to do those tasks allocated to him and would have been paid broadly for a 37½ hour week. To me it appears that his job was working for LGL, not that he made his money by providing something to LGL. He was an expert skilled independently minded professional who worked at LGL and for no one else on terms (as to what he did, when he was there and how his work was organised) which were substantially similar (although not identical) to those applicable to an employee but on fixed term contracts."
The outstanding PAYE and NI amounted to just over £27,000.
Full decision is available online: here (Bailii)
Appeal
A spokesman for the Professional Contractors Group (PCG) said:" Three of the four cases seem unremarkable for the most part: the two wins were in line with previous Revenue defeats on IR35, and the MKM loss was unsurprising - unfortunately for Mr Ellwood, he did not have a strong case.
"The Dragonfly case is much more serious: it seems to undermine the key points of law that PCG and others have clarified over numerous years of test cases, and if upheld could destroy the defences that all well-informed contractors will have built up against IR35. Based on the facts and on past cases, this contract should clearly not have been found to be within IR35. Accordingly, PCG is funding an appeal of this case to the High Court."
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Susie Hughes © Shout99 2008
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