The case has been closely followed by tax experts and contractors. The Professional Contractors Group (PCG), who funded the appeal, feared that a defeat could undermine much of the successful existing defence or IR35.
Dragonfly, based in Wiltshire, specialises in IT testing services. It lost its IR35 case before the Special Commissioners in January 2008, leaving its co-owner, Jon Bessell, facing a tax and NIC bill of £99,000. The High Court has now supported the Special Commissioners decision. (See: Two IR35 defeats cost contractors £130,000 - Shout99, Jan 2008)
In January 2008, Special Commissioner, Charles Hellier agreed with HMRC that, for IR35 purposes, Mr Bessell was part and parcel of his client, AA's operation and should be treated as an employee. Mr Bessell had a limited right of substitution, but AA staff contended at the Commissioner's hearing that, in reality, they would have wanted to vet a substitute and would be 'unhappy' if one turned up unannounced. Mr Bessell provided his services for three years to AA through an agency, DPP International Limited.
On its appeal to the High Court, Mr Andrew Stafford QC who represented Dragonfly contended that the Special Commissioner erred in law in four respects:
- He wrongly concluded that the right of substitution within the notional contracts would not have been inconsistent with employment. He should have concluded that the notional contracts would have contained provisions relating to substitution which would have prevented them from being contracts of service.
- He wrongly concluded that the notional contracts would have contained provisions conferring upon the AA a sufficient right of control to justify the conclusion that the contracts would have been contracts of service. He should have concluded that they would not have contained provisions conferring sufficient rights of control to create a contract of service.
- He wrongly concluded that the intentions of the parties were irrelevant. He should have taken their intentions into account, and had he done so he would have concluded that neither the AA nor Mr Bessell intended that he should be an employee of the AA.
- He wrongly directed himself that the relevant dividing line lay between being in business on one's own account on the one side, and employment on the other side. He failed to allow for the fact that a person may be self-employed without necessarily being in business on his own account. The law recognises the concept of "worker" status. The Special Commissioner evaluated the circumstances without taking into account the fact that an individual might be a worker rather than an employee.
In his decision, Mr Justice Henderson considered each point in turn.
Substitution: He found that the findings of fact were 'unassailable', and they amply justify the Special Commissioner's conclusion that each of the notional contracts between the AA and Mr Bessell would have been for the services of Mr Bessell, and would have provided that he could send a substitute 'only if the AA had given notice that that particular substitute was acceptable in place of Mr Bessell for such period as it should specify'. It was his view unrealistic to suppose that the AA would ever have agreed to an unqualified right of substitution. He also had no doubt that a limited right of substitution in these terms would have been compatible with the existence of a relationship of employment between the AA and Mr Bessell. The situation was, he said, quite different from the extreme and unqualified right of substitution which the Court of Appeal considered (in Tanton).
Control: He concluded: "On the strength of the oral evidence, the Special Commissioner was in my view fully entitled to conclude that Mr Bessell's performance of his duties was subject to a degree of supervision and quality control which went beyond merely directing him when and where to work. In the case of a skilled worker, you do not expect to find control over how the work is done. Conversely, in the case of a self-employed worker in business on his own account you would not normally expect to find regular appraisal and monitoring of the kind attested to by Mr Palmer and Miss Tooze (for the AA). The weight and significance to be attached to this evidence was a matter for the Special Commissioner, and in my view it was open to him to conclude that the nature and degree of the control by the AA under the hypothetical contract was on balance a pointer towards employment."
Intention of the parties: He concluded: "The Special Commissioner dealt with the point in a compressed fashion, merely saying that "the intention of the parties as regards whether or not there was to be an employment seems irrelevant". I read this as a conclusion that the question of intention is irrelevant in the circumstances of the present case, rather than as a proposition of law that statements of intention can never be relevant for the purposes of the hypothetical contract. So understood, there was in my judgment no error of law in his conclusion. If (contrary to my primary view) he did intend his statement to be read in the latter sense, he would in my view have erred in law; but there would be no point in remitting the matter to him because I am satisfied that in the present case the inclusion of a term in the hypothetical contract to the effect that the parties did not intend to create a relationship of employment could not by itself have reasonably permitted the Special Commissioner to reach the opposite conclusion about Mr Bessell's notional status as an employee."
Worker status: Mr Stafford, for Dragonfly, pointed out that in certain statutory contexts, there is a special definition of "worker" which includes not only employees under a contract of employment but also an intermediate category of people who are neither in business on their own account nor employees. He submitted (correctly) that the statutory reach of the IR35 legislation is confined to (notional) employees, and suggested that the Special Commissioner's analysis was vitiated by his failure to consider the possibility that Mr Bessell might have fallen into a third intermediate category of this nature.
Mr Justice Henderson said: "I am unable to accept this submission. Mr Stafford accepted that the general law of employment does not recognise any intermediate category between employment on the one hand and self-employment on the other. I can see no reason why the Special Commissioner should have taken into account other possible categories of worker which exist only for the purposes of very specific and self-contained statutory codes. I agree with counsel for HMRC that such categories only have meaning and relevance in the particular contexts in which they are found. In the context of IR35, the only distinction that matters is whether the notional contract would be a contract of service or not. Mr Hellier clearly had that distinction well in mind, and for the reasons which I have given I consider that his conclusion that Mr Bessell fell on the employment side of the line is unassailable."
He concluded that the appeal must be dismissed, leaving Mr Bessell to face a tax and Nic bill of £99,000 - and contractors waiting to see what future precedences this will set against their IR35 cases.
Full judgment available here (Bailli).
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Susie Hughes © Shout99 2008