[In response to John Newth’s article posted on www.shout99.com on 2 June 2005.].
The article by John Newth “Whither IR35” (2/6/05) concluded by posing the question: after nearly five years of this legislation where are taxpayers and the professions now? He answers the question by drawing to our attention some crucial factors that must be present in both the written contract and the way in which the contractual terms are carried out in practice. He says that provided these factors are present, “there is little to fear”.
Unfortunately the world of IR35 is not quite that simple.
- Crucial factor no. 1: substitution. Quite correctly, Mr. Newth draws to our attention the decision in Express and Echo Publications Ltd v Tanton. The Judge said that a right of substitution was inconsistent with a contract of employment. Fine. But the Revenue have been greatly encouraged by the remarks of the Judge in Synaptek Ltd v Young, who said that where no substitute worker has been used in practice, it is necessary to look at other factors such as control. How many contractors have exercised their right to provide a substitute worker? In my extensive experience, precious few.
- Crucial factor no. 2: lack of control. Mr. Newth refers to the case of Staples v Department of Health, in which a lack of control over “how” the work was done meant that there was insufficient control to make the worker an employee. However, nowadays the Revenue are arguing that in the modern workplace skilled employees are allowed by their employers to exercise a great deal of freedom over “how”. This means that if the contractor’s client controls “what”, “where” and “when”, the absence of control over “how” is unlikely to win the argument.
- Crucial factor no. 3: lack of mutuality. This subject is fraught with misunderstanding and is wide open to misinterpretation. All commercial relationships and transactions have a degree of mutuality of obligation. If A supplies B with a service, then B is obliged to pay A the price of that service. If B undertakes to pay A the price, then A is obliged to provide the service required. Get the idea? All contracts contain strong elements of mutuality of obligation. That is what a contract is. There would be no point in having a contract that failed to place obligations upon the parties concerned. Thus it is easy for the Revenue to point to the presence of a level of mutuality of obligation.
Revenue Tactics
Part of the problem is a hardening of the Revenue’s attitude and tactics over the years. It is no longer sufficient to challenge the Revenue to a battle before an Appeal Tribunal and wait for them to back down. To those of us who conduct IR35 arguments with Status Inspectors every day, it is clear that they have been greatly encouraged by those cases that the Revenue has won, whether before the Special Commissioners or at the High Court. Even if we have a good case that appears to be supported by Case Law, it is not every client who wants to risk the substantial costs of a formal hearing. As John Newth points out, there do seem to be some inconsistencies in judgements. The “case law strategy” proclaimed by some organisations is all very well if you win the case. If you lose, you run the risk of queering the pitch for everyone else.
There is no doubt that it is becoming harder to convince the Revenue of the strengths of our arguments in IR35 cases. The judgement in the Usetech Ltd v Young case was based upon the terms of the contract between the agency and the end client, which the contractor had never seen and over which he had no control. As a result, the Status Inspectors are more determined than ever to get hold of the end client’s contract and, wherever possible, interview the end client’s staff.
Agency – End Client Contracts
In an alarming number of cases we are discovering that the terms of the contractor’s agreement with the agency are significantly at odds with the terms of the contract between the agency and the end client. Thus the great care with which taxpayers and professionals are taking to ensure that contracts are IR35 compliant is being wasted. It is typical of such cases to discover that although the agency appears to have engaged the services of a company, rather than a named individual, in the agency’s contract with the end client there is no mention of the company, and the end client is given the clear impression that they are engaging the personal service of a named individual. There is no right of substitution. Moreover, the terms will indicate that the named individual is to work under the control of the end client, even to the extent of a set number of working hours and having to request permission to take time off. Often the supposed services are described as a job, with a named line manager and other references that are characteristic of employment. In extreme cases, the terms and conditions are so far from representing a contract for services as to appear more like feudal bondage.
In a recent case, the agency had issued the end client with written terms that referred to the contractor as a “temporary worker”, and stated that the client must supervise the worker, who must work under the client’s direction and control, and must be treated like one of the client’s employees. Imagine my dismay, when I discovered that the agency concerned was being advised by a very prominent firm of employment law and tax consultants!
Conclusions
- IR35 cases are becoming harder to defend, due to recent appeal decisions, a hardening of Revenue attitudes, and unhelpful agency-end client contracts.
- There are some obvious legal implications of instances where agencies appear to be entering into duplicitous contracts, which seem designed to mislead the contractor about the working arrangements, and in effect mislead the end client also. Is it lawful to obtain money and services by deception?
- Some agencies are being badly advised. In turn, they are misleading contractors and end clients about the nature of the agreements they are entering into. It is necessary for all parties involved to obtain proper advice from experts in the specific field of IR35.
- Despite the best efforts of taxpayers and the professions to avoid IR35, there is still a great deal to fear.
Now more than ever you should consider protecting yourself against an Inland Revenue enquiry. Have your contracts reviewed and take out the Insurance that is available to you.