To date 31/07/03 there have been four IR35 cases heard by a Tax Commissioner where the judgments have been made public. Following each case Lawspeed published in the press and/or web media a summary and conclusion article for the benefit of those interested. The articles are reproduced below.

• Synaptek v Young (2003)
• LIME IT v Justin (2002)
• FS Consulting v McCaul (2001)
• Battersby v Campbell (2001)

Synaptek -v- Young (2003)

Article - Synaptek / Stutchbury Judgement Handed Down
Judgement was handed down recently in the much-vaunted IR35 High Court case of Synaptek v IR, also known as the Stutchbury case. Mr Stutchbury had originally been ruled to be within IR35 at the General Commissioners and had appealed to the High Court to contest this view. The Court found in favour of the Revenue, confirming the original ruling that IR35 did apply to the arrangements between Mr Stutchbury and his end client, EDS.

The contractual arrangement was complicated by the fact that there was no direct contractual relationship between Mr Stutchbury’s company Synaptek and EDS, as Synaptek’s agreement to provide services was made with an agency, NESCO. EDS was itself providing services to the Benefits Agency at the Inland Revenue as successor to the Government IT Services Agency, which was the end client of Synaptek and NESCO during a previous period.

Mr Justice Hart emphasised throughout that it is not for him to decide the deemed employment status of Mr Stutchbury, merely to decide whether the General Commissioners had erred in law in their original decision. He has not therefore given any additional guidance as to the relative weight of the different status indicators, but it will be useful for contractors to be aware of some of the salient facts about the engagement.

The Judge summarised the factors in this case that pointed to a “contract for services” (deemed self-employment) as follows:

• Synaptek/Mr Stutchbury was “in business on its own account”.
• EDS only had “limited control” over ‘how’ the work was to be performed, or specifically ‘when’.
• Contract contained a “right of substitution”.
• Synaptek was “responsible for training” for its representatives and provision of computer facilities at its own premises.
• Intellectual Property Rights had to be assigned to EDS, rather than already vesting in EDS as would be the case for EDS employees.
• Synaptek was required to maintain “professional indemnity insurance”.
• Synaptek/Mr Stutchbury had “flexibility of hours worked”.
• Synaptek/Mr Stutchbury brought in its “own reference books” whilst on-site.

Conversely, the Judge summarised the factors in this case that pointed to a “contract of services” (deemed employment) as follows:

• Minimum 37.5 hours per week required, broadly equivalent to a “normal working week”.
• The only risk borne by Synaptek/Mr Stutchbury was the risk of insolvency of the agency or EDS. The duration was for a “fixed period” of six months rather than being linked to completion of a particular project.
• Mr Stutchbury worked “alongside EDS employees” and was sufficiently integrated to have an EDS line manager.
• The contract required “compliance with all instructions” of EDS.

It is interesting that, although mutuality of obligations was not stated as a specific factor for or against a contract for services, it was examined in the judgement.

The decision is a blow to many contractors who may believe that they are outside the scope of IR35 and once again highlights the importance of the actual arrangements being properly reflected in appropriate contract terms. The decision confirms the importance of properly drafted ‘project-based’ contracts as a means of legitimately avoiding IR35. It also counters advice given by some advisors that all that is required is for the contractor to be ‘in business on his own account’ - a theory effectively rejected by the Court. The underlying principle remains true that, given the complexities involved, the only security a contractor can gain is to have proper legal advice from the outset on how to operate, matched with a proper commercial agreement. There is no simple shortcut around IR35, and the current lure in some quarters for contractors to seek comfort from completing a simple question and answer form is simplistic and dangerous in the extreme.

Lime IT -v- Justin (2002)

Article - Contractor wins IR35 case (LIME IT)
The recent decision in the case of Lime-IT Limited v Michael Justin (an officer of the Board of the Inland Revenue) has highlighted the importance of project-based contracts as a means of legitimately operating outside IR35. The decision is the first to be won by a contractor at the Special Commissioners when considering employment status and IR35. Although the decision does not set legal precedent, it does underline the principle that contractors can operate outside IR35. This result is good news for all contractors.

However, it must be remembered that every case will be decided upon its specific facts. Looking at this case the Special Commissioner, Dr Avery Jones, paid particular attention to the terms of the contract and schedules as well as what happened in practise. Specific words were selected from the schedule to the agency/Lime-IT contract as being particularly relevant. The project description, location, term and hours, were all held to support the fact that Lime was engaged on project work, which itself was regarded by the Commissioner as a key feature of “deemed” self employment. The words mirrored what happened in practise and were therefore considered highly important. In addition it was held that there was a valid right of substitution, even though Lime IT had not substituted, but this finding was not conclusive in itself.

One other key factor in the case was the lack of evidence from the client, Marconi. The terms of the Marconi-ERS contract were not particularly useful because they were based on a purchase order that was more relevant to the supply of goods than services. In 99% of cases this will not be the reality. As the client was not available to give evidence the Commissioner noted that “in future cases on this legislation (and its income tax equivalent) the Special Commissioners will wish to explore at a preliminary hearing whether it is possible to obtain evidence from the client.” This will impact upon future cases brought before the Special Commissioners.

The Special Commissioner summarised the key pointers against the engagement being within IR35 as follows:

1. Marconi contracted for particular projects.
2. The end-date and the number of hours were both estimates of the time needed to complete those projects.
3. Miss Fernley did not work a regular pattern of hours; the hours were dictated by the requirements of the work.
4. The Appellant [Lime-IT] could not be required to do work outside the specification.
5. The Appellant purchased a laptop with a particular specification specially for use in the job, although there was no obligation on them to do so.
6. The payment terms were 30 days after invoice and they suffered delays in being paid in the way that businesses do.
7. There was a right for the Appellant to substitute another supplier.
8. Miss Fernley did not work alongside any other Marconi employees as part and parcel of the Marconi organisation.
9. During the Marconi contract the Appellant operated as a normal small business with its own office working for four other clients.

This decision confirms the thinking of Lawspeed, which has written numerous articles on the subject over the last 2 years. The existence of a project properly described in a schedule is key to a contractor otherwise operating as a genuine business, and emphasis on substitution alone should not be relied upon. The contract wording should reflect the actual practise. Given that the first two IR35 cases went in favour of the Revenue, this decision is excellent news for all contractors. The case demonstrates that correct wording in the contract is essential and it is particularly pleasing that wording in the schedule relied upon by the Special Commissioner was drafted by Lawspeed for the agency ERS. This result will be especially helpful to those contractors that are working through agencies that use contracts and schedules drafted by Lawspeed.

Contractors should remain vigilant in ensuring that the terms on which they operate reflect their actual working practices, and that work should be project based. In that event the Lime IT case shows that the battle can be won.

FS Consulting -v- McCaul (2001)

Article - Inland Revenue win second case at the Special Commissioners (FS Consulting v McCaul)
The second IR35 case has been heard before the Special Commissioners and the Inland Revenue has again been successful in establishing that IR35 applied to the contractor. The case of FS Consulting Limited v McCaul (HM Inspector of Taxes) was heard in December and the detailed judgment was released recently.

The arguments put forward by the contractor’s counsel focussed on interpretation of the Social Security Regulations and the issue of mutuality of obligation while the Revenue concentrated on the usual issues of working solely for one client, on the client’s site, for a set number of hours using the client’s equipment. The Commissioner found that the contractor was not controlled by the client but was integrated to a degree into the workforce.

The Special Commissioner considered first the factors found which pointed to the conclusion that there was a contract of service.

Those factors were:

• Obligation
• Control of a Skilled Man
• Control through Termination of Contract
• Lack of Hiring Employees
• Lack of Equipment
• Hourly Wage
• Lack of Risk and Profit
• Mutuality of Obligation
• Exclusivity
• Part & Parcel

The Special Commissioner then considered the factors that pointed to the conclusion that Mr Simpson was working under a contract for services.

Those factors were:

• Lack of Holiday/Sick Pay
• Lack of Permanence
• Limited Integration
• Substitution
• Control of a Skilled Man

The Special Commissioner concluded that on balance the factors weighing against there being a contract for services was outweighed by the factors for there being a contract of service. The Commissioner made particular reference to the fact that because the contracts were not professionally drafted it was necessary to look at the substance of the relationship rather than the wording of the contract. The message is clear that for a contractor to legitimately operate outside IR35 there must be a comprehensive commercial contract.

Battersby -v- Campbell (2001)

Article - Revenue wins first IR35 case (Battersby v Campbell)
In the first IR35 case to go before the Special Commissioners an IT contractor has lost his appeal against the Inland Revenue determination that IR35 applied to his engagement. An anonymised Special Commissioners decision was released on the 31st of October in the case of Battersby v Campbell (HM Inspector of Taxes) heard before a single Commissioner on the 3rd of August 2001.

The facts were that Mr Battersby worked through his own limited company for a bank for almost seven years. During this time he contracted with an agency and also direct with the bank. In the 6-month engagement in question he was contracted via an agency. In April 2001 he took up a permanent position with the bank. The case was concerned with due payments of National Insurance rather than PAYE.

The decision of the tribunal was that IR35 applied due to the fact that Mr. Battersby was required to provide personal service (he had no right of substitution), he was required to work a given number of hours a day, although he was not told how to do his work he was subject to the client’s control, he did not hire his own employees, he did not provide any equipment, he was not subject to any financial risk or opportunity to profit or loss (he was paid an hourly rate), he was part and parcel of the client’s organisation (he was a team leader who was managed, and who himself managed contractors and employees), he provided services exclusively for the bank and the length of engagement had an element of permanency (7 years). These facts outweighed those in favour of IR35 not applying such as the intention not to be an employee, the lack of sick pay or holiday pay, the lack of job security and the custom in the industry for contractors to be treated as self-employed.

Although this would have been a hard case to win on the facts Mr. Battersby did not assist his situation by representing himself. The Revenue will always have the upper hand against those who choose not to seek professional assistance. In his submissions Mr. Battersby did not support his arguments with case law nor was he in a position to refute the case law cited by the Revenue. In fact, many of the Revenue’s arguments could have been challenged by reference to modern case law precedents. The Commissioner’s role is to determine the facts and apply the law as presented. So where a contractor does not put forward any case law to support his arguments then the Commissioners will have little option but to find in favour of the Revenue.

Adrian Marlowe, MD of Lawspeed, said “It is vitally important to have proper representation when facing the Revenue, we have successfully challenged the Revenue in many IR35 appeals, before getting to the Commissioners, and our results are always based on detailed analysis of the legislation and applying the relevant case law.” He went on to state that, “Contractors with a genuine business operation who have sought advice and negotiated effective contracts should not be too worried by this result.” Decisions by the Special Commissioners do not set legally binding precedent but they may be of influence in other hearings before the Commissioners.

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