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Judgement was handed down on Friday 28/03/03 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”. This was demonstrated by substantial investment in the company; a varied client base both historically and during the currency of the EDS engagement; Synaptek had in the past engaged a total of four to five employees.
· EDS only had “limited control” over ‘how’ the work was to be performed, or specifically ‘when’. The Judge did not particularly refer to the limited control as to ‘where’ the work was performed – this was one initial location subject to change by agreement with the agency.
· Contract contained a “right of substitution”. This was stated as a factor for deemed self-employment even though both parties had accepted that Mr Stutchbury personally performed services. The actual clause in the agreement was negatively worded and required the unqualified consent of EDS. Mr Justice Hart stated: “the effect of the contract is that, unless and until agreed otherwise, the services do have to be performed personally by Mr Stutchbury”.
· 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. This was stated as a factor for deemed self-employment even though Mr Stutchbury did not use any of his (or Synaptek’s) equipment on-site specifically to perform the work.

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. This point is of interest as there are other facts that suggest that there was more risk than was identified by the Judge. For example the Agreement could be terminated with immediate effect if the services were not performed to the satisfaction of EDS.
· The duration was for a “fixed period” of six months rather than being linked to completion of a particular project. This emphasises the need for a genuinely project-based contract rather than merely ‘time and skill-set’.
· 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 important to note that there was no subsequent mention of the other parts of the respective clause in the Agreement, which also referred to on-site rules, procedures, policies etc 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 particular clause in the agreement that had been relied on by Synaptek to exclude mutuality of obligation read as follows:

“6.4: In any event no payment will be made by NESCO to the Company in respect of any contractual period not actually worked including notice periods.”

The Judge contested that the clause served merely to emphasise that payment is dependent on actual work having been done, and does not detract from a separate clause (4.3) requiring the agency (and through the ‘hypothetical contract’ requiring EDS) “to allocate work to the Company”. The Judge also highlighted the often-misunderstood key distinction between mutuality of obligation during the currency of the contract, and mutuality of obligation between contracts. The Judge effectively considered that there must be an obligation on the agency/EDS to provide work during the currency of the contract, as otherwise the various termination provisions could serve no purpose.

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.

Article Written 01/04/03