IR35 is still with us, despite the fact that HMRC have recently lost a number of cases

Some have seized on these in business/financial risk factors referred to in these cases and determined that these are the most important. Whilst, it is important to demonstrate that one is operating in a business-like fashion and having a designated office space, office equipment, business insurances etc, are all relevant, yet no IR35 status case has ever been won on the basis of these factors alone. Greatest emphasis is still given to personal service, control, mutuality and substitution. These are the key issues on which tribunal cases are won.

It is interesting that in the first of the recent cases to be decided, MBF Design Services, it was determined that it was highly unlikely that Mark Fitzpatrick (the Worker) would have been able to send a substitute to work at Airbus (the Client), but the Judge Malachy Cornwall-Kelly noted two important points: firstly, the contract between Airbus and the agency did not require specific individuals but resources to undertake the work; secondly, that his inability to send a substitute was “not inconsistent with his having been engaged as a professional man whose personal expertise was valued as might be that of an architect or surgeon. Against the background of MBF’s well-established existence and its history of engagements with various end-users, Mr Fitzpatrick’s status as a freelance specialist in his area is entirely credible.”

In my experience it is not unusual for the provision of a substitute to be impractical so this will be of comfort to contractors. By their nature specialist skills will limit the practicability of substitution.

With regard to control HMRC often argue that being tied to the site and the client’s working hours is an indicator of control, as they did in the case of MBF: however the judge took issue: “Mr Fitzpatrick’s design work had normally to be performed on site and with Airbus’s equipment because there was no other sensible way to do it, given the nature of the overall project of building an aircraft; there are many other examples of an independent contractor’s work being done on the client’s site and with the client’s equipment for the same sort of reasons: an electrician repairing a wiring circuit, a plumber adapting a drainage system, an engineer checking a safety installation of an oil rig and so on. In the context, we do not see on-site working as a conclusive indicator of employment.” In other words it appears that the client may have control over “when” and “where” the work is performed and presumably the client usually decides what is to be done: however it is “how” the work is done which determines where control lies.

Again this will resonate with contractors on long term assignments such as project managers who would be looking to defend themselves against IR35 despite being tied to locations and fixed working patterns.

With regard to mutuality of obligation HMRC consider that mutuality exists if work is provided and a fee received but this point which was completely refuted in the ECR Consulting case. When presented with the argument that this would be enough to ensure that the irreducible minimum of mutual obligation existed in the hypothetical contract, the judge said:

“We cannot accept that. As indicated earlier we believe that VDS (the Client) was unconcerned as to who the contractor should be, they were merely interested in obtaining a necessary skill for the shortest period of time as cheaply as possible. We do not accept that there was any mutuality of obligation.”

Related to this point, HMRC have argued that hourly rates were indicative of employment to which the judge in the Primary Path case took issue, believing that for someone of Phil Winfield’s (the Worker) skill and expertise a monthly salary in an employment contract would be more appropriate. He felt hourly rates were a feature of the charging structure of both professional firms and skilled tradesmen and if they pointed in any direction – it was away from employment. This is an interesting interpretation of hourly pay and will be reassuring to contractors who are engaged on an hourly or daily rate.

The recent cases are refining the guidance that was available from earlier IR35 cases such as Dragonfly Consulting. Non IR35 cases such as Autoclenz also help to provide general guidance regarding tax status which is useful to remember. In Autoclenz the Supreme Court outlined the key questions that a Tribunal must answer when assessing a disputed contract namely: What are the ‘actual legal obligations’ of the parties? And what was the true agreement between the parties? This is re-enforcing the principle that was highlighted in the earlier Weightwatchers case that contractual terms must reflect reality. It impacts IR35 cases in so far as contractors need to think about how substitution and other key clauses could work in practice and start to reflect this is in their contracts rather than just using standard clauses. This will focus their mind on what is and isn’t possible so that contracts are in line with what happens in practice.

HMRC for their part are no doubt looking for “softer-targets” to challenge as far as employment tax status is concerned and they have stated that they will be looking at actors and potentially other professions working through service companies. Such companies still provide the opportunity to make taxation and national insurance savings and as long as they do so will be a bone of contention for them.

Whilst the government did not want to lose face by abolishing IR35 it seems that they must also target other areas of “false” self employment to be sure of success. Arguably sectors such as the construction industry could provide richer pickings. Definitely a case of watch this space for further developments in the strategy used by HMRC.