IR35 - An Update
We have been expecting it to be abolished in the last couple of Budgets but it lives on!
Q. How much did HMRC collect through IR35 inquiries during 2010/11?
HMRC is to set up dedicated helplines staffed by specialists to improve the administration of IR35, it has been announced. They may be very quiet!
IR35 is now more toothless than at any time since its inception. It should now be easier than ever to circumnavigate, if the contract is arranged in the right way.
There have been a couple of important recent cases:
Primary Path v HMRC case (TC 01306)
The case involved an IT contractor, trading through an intermediary company. He worked on two database interface projects for GlaxoSmithKlein under contracts arranged by two separate agencies. The two assignments were carried under series of sequential contracts during 2001-03. HMRC decided that the arrangement was caught by the IR35 regime.
The tribunal decided the following key points:
• Mutality of obligation - HMRC’s lawyer argued that the obligation on the worker to provide his work and skill and an obligation on the employer to pay for the work done represented the “irreducible minimum of obligation” on each side in order to create a contract of employment. However, the judge concluded, “[the worker] was paid only for the hours he worked, and should at any time his strand of work within the overall project have suffered a hiatus for any reason, we cannot see that he had any contractual basis for demanding other work or payment whilst he waited for his work to resume. Nor is there anything to suggest that GSK had it in mind to offer work beyond the specific project for which Mr Winfield’s services were engaged. This feature of his hypothetical contract we see as calling into question whether it is an employment contract – it is a feature which is more indicative of a contract for services.”
• Control - Because of his specialist programming skills, the worker was subject little supervision other than that to ensure his work fitted the larger project spec and timetable - as might be expected from an independent contractor. “He was left to do the work as he saw fit,” the judge noted. “Whilst we take note that the question of control should not be given too much significance in the case of a specialist worker, in so far as it is brought into the balance in this case it points away from a contract of employment.”
• Other criteria - There were clear substitution clauses in Winfield’s contracts which tilted the hypothetical relationship away from being an employment contract, but HMRC introduced a couple of other factors including the fact that the contractor was paid on an hourly basis, and the apparent lack of commercial risk for him in taking up the work with GSK as a sign that he was not carrying out a business on his own account:
- Remuneration - HMRC’s argument about Winfield’s hourly pay rates and 37.5-hour week got short shrift from the tribunal judges. “In the context of professional skills, remuneration by reference to hours worked at an hourly rate is, in the present world, a feature… of the fee charging structure of professional service firms (and, for that matter, plumbers, electricians and other skilled technicians and craftsmen). Therefore, in so far as the nature of the remuneration in Mr Winfield’s hypothetical contract points in any direction, it does so away from employment.” It did not help HMRC’s case that he enjoyed no pension rights or holiday entitlement during his engagement.
- Carrying on business on his own account - One of the weaknesses of HMRC’s case was that not only did the hypothetical contract permit Winfield to undertake assignments for other parties, he actually did so - doing speculative work during his first engagement with another supplier that led to his second project with GSK. On the subject of financial risk, the judge commented “We are of the view that the Appellant was exposed to financial risk in a manner and to an extent that Mr Winfield would not have been exposed to had he been an employee. Those risks are essentially the risks which are run by a self-employed worker,”
The taxpayer’s appeal was upheld.
Although the above case reinforces the important of substitution clauses, the recent case of Autoclenz Ltd v Belcher and Others (UKSC 41) outlines the importance that the contract clauses accurately reflect the reality of the arrangement.
The UK Supreme Court has upheld an earlier ruling by the Court of Appeal that contract wording cannot determine the employment status of workers, if it doesn't reflect the reality of the working arrangements.
The Court upheld an earlier decision in the case of Autoclenz Limited v. Belcher and others, which decided that although employment contracts stated that a number of car valeters were 'self employed', they were in reality employees of Autoclenz Limited.
The contracts between the workers and the car valeting firm stated that the valeters were sub-contracted, that they were able to provide substitutes if they were not able to work, and that no mutuality of obligation existed between the two parties.
However, the terms of these contracts did not reflect the genuine working practices of the valeters, nor the original intentions of the parties.
This ruling, which was handed down on 27th July 2011, once again demonstrates that there is no point in drafting a perfect contract of 'self employment' unless it reflects the true nature of the relationship between parties.
Moral: Good “contracts for services” should be drawn up but MUST reflect the reality of the contract.