Northern Light Solutions Limited v The Commissioners For Her Majesty’s Revenue and Customs UT/2020/000353
The Northern Light Solutions Limited ("NLS") judgment is somewhat concerning since few contractors can operate outside of IR35 if the judgment is taken at face value.
The judges seem to have fallen into the trap of overzealously applying the work/wage bargain. Judgments such as Usetech confirm that mutuality of obligations is not established if there is no obligation to pay when no work is undertaken. However, this argument cannot be taken in isolation and in NLS there was an expectation based on 7 years of successive renewals to provide work for the contractor's representative in the capacity of a project manager.
In Usetech, the appeal failed because there was an expectation to work 50 hours per week and "downtime" did not occur, therefore, rendering the payment for work done argument academic. Similarly, in Cotswold Developments Construction Ltd v Williams (per Langstaff J) "the focus must be upon whether or not there is some obligation upon an individual to work, and some obligation upon the other party to provide or pay for it."
Bean LJ developed this point in Addison Lee; mutuality of obligations existed "when the drivers were logged on and had not notified the company through the App that they were on break time, they were working at the company’s disposal and carrying out their activities or duties for the purposes of the Working Time Regulations", i.e., an obligation to do "some" work. The "dominant feature" (per Lord Wilson in Pimlico Plumbers) in the NLS contracts was an ongoing obligation to work inferred by the requirement to work 7.5 hours per day under the job title of project manager. Had the work been structured as a package of pre-agreed objectives rather than the supply of a project manager, the contractor may have forcefully argued that there was no ongoing obligation to work.
The arguments in NLS about the duration of an engagement are helpful. In Datagate, counsel argued persuasively that the duration of the engagement was determined by the nature of the services so was of little relevance. Changes in working practices over time are of greater concern. In Alternative Book Company, the taxpayer accepted extension after extension like NLS (possibly for different projects). The tribunal imputed mutuality of obligations based on an expectation for the client to provide work and an expectation for the contractor to do the work.
Whether a right to substitute is valid is determined by both the drafting of the clause and the nature of the services which is why role-based engagements are fatal for IR35, i.e., the client expects a specific person to undertake the work and cannot be said to be a customer of a business whether or not carried on by an individual or a team.
The judgment relied extensively on disputed notes of meetings held in 2014 and 2016 between HM Revenue & Customs and representatives of the client to override contractual substitution clauses, notwithstanding the obligation in section 49(4) Income Tax (Earnings and Pensions) Act 2003 to consider the terms on which the services are provided. Despite clear concerns regarding the notes, the "reality was that [substitution] … was not going to happen".
While substitution was not impossible, the judgment is appealable because the degree of "violence" (as per Atholl House Productions) inflicted by the judges in considering the notional contract was excessive and nullified a valid contractual right to substitute (applying Pimlico Plumbers). In practice, any substitute would need to be vetted for security purposes and brought up to speed on the project - the corollary would suggest a lack of understanding on the part of the client and others. The fact that substitution has not been exercised is irrelevant (as per Creasey).
The critical question was whether the client had a right of control over the contractor of a sufficient degree to constitute an employment relationship. Despite the fact that the contractor could not be moved from task to task, the judges relied on the Nationwide Change Framework to dismiss the appeal. However, it is clear that the Nationwide Change Framework was not examined in detail, nor were representatives of the client questioned about the practical meaning of the Nationwide Change Framework. Consequently, the judges took a literal approach to the Nationwide Change Framework and concluded that a relationship of subordination existed.
Lessons for contractors:
- Never meet with HM Revenue & Customs; any questions can be dealt with in correspondence.
- A substitution clause must be drafted as an enforceable right. A right to substitute is a natural consequence of a contract for services. If the client genuinely requires a service to be delivered, it follows that the identity of the individual used by the contractor is of secondary importance. If the client requires a specific individual to fill a role then substitution won't help and will rightly be dismissed as "window dressing".
- Never accept HM Revenue & Customs' refusal to disclose evidence. If HM Revenue & Customs refuses to disclose full notes of a meeting with the client make an application for disclosure pursuant to rule 16(1)(b) Tribunal Procedure (Upper Tribunal) Rules 2008. The tribunal has extensive powers under rule 7 to deal with non-compliance. A competent lawyer is trained to use rules to a party's advantage.
- Evidence can be challenged and witnesses examined by counsel. It is unlikely that the Nationwide Change Framework (as referenced in the judgment) imposed a right of supervision, direction or control of a sufficient degree to give rise to a relationship of subordination. Perhaps the Court of Appeal may reach a different verdict if such documents are critically assessed considering evidence of how project management services are typically performed.
- It remains vital to seek specialist independent legal advice regarding the contract. This appeal failed because the contractor was required to supply a project manager, not undertake a project. Even if the client is medium or large, the contract may contain a tax indemnity clause, so failure to properly set out the work as a package of deliverable objectives (among many other factors) can have severe consequences.
- Crucially, as NLS demonstrates, role-based status determination statements are inherently flawed and cannot be relied upon, either by the client or the contractor.
Introducing the Status Arbitration Service
The Law Place Limited is pleased to announce the Status Arbitration Service ("SAS") to provide a cost-effective, competent and rapid IR35 status determination solution for clients and contractors.
The Finance Act 2020 introduced the "client-led status disagreement process", which is wholly unsatisfactory and offends against natural justice by making the client act as judge, jury and executioner in attempting to decide the IR35 status of an engagement.
It has quickly become apparent that clients lack the expertise to assess IR35 status properly. When challenged, clients often rely on incorrect interpretations of the law, causing liability for breach of the Agency Worker Regulations 2010. Worse still, the same arguments used by a client to enforce a blanket decision on contractors can be used in the employment tribunal to claim worker's rights.
No matter how competent and experienced a client's in-house legal department may be, it is impossible to remove the perception of bias and conflict of interest.
The result is that many contractors have been forced to use umbrella companies against their wishes and clients have experienced difficulties in procuring specialist services.
How does the SAS work?
-The parties agree to refer a status dispute to the SAS for binding arbitration.
-The parties jointly instruct The Law Place Limited to arbitrate having agreed on a competitive fee.
-The outcome is a fully reasoned legal opinion providing a clear conclusion on the status of the engagement having considered the contractual terms and evidence concerning the working practices. It is negligent to disregard the contract terms irrespective of claims by others.
The process is rapid and straightforward, taking 1-3 days.
Advantages of the SAS
-There's no risk of a conflict of interest.
-Based on our 16 years of experience in IR35 and employment status.
-The Law Place Limited's director was trained in Commercial Arbitration at the University of Westminster.
-We do not recommend any insurers or promote insurance policies, so our advice is pure and carries no risk regarding the Managed Service Companies legislation.
-Prevents reputational harm for clients by promoting accuracy, clarity and fairness.
-The Law Place Limited is insured to provide legal advice on IR35.
-Don't be afraid of rocking the boat - Who Dares Wins.
Or you could rely on CEST or a contractor lacking legal qualifications and dedicated IR35 experience to help with "compliance". Remember, CEST is like a genie in the lamp giving any result you wish depending on the answers given, so its use does not satisfy the requirement to "reasonable care" in assessing status. Reasonable care means the behaviour of a "prudent and reasonable taxpayer in the position of the taxpayer in question" (per Judge Berner in HMRC v David Collis). It does not mean filling in a questionnaire and hoping for the best.
We acknowledge that Status Arbitration Service is a genius name and is the copyright of The Law Place Limited, all rights reserved.
The Law Place Limited is pleased to announce the launch of Umbrella Company Freeclaims, offering free Particulars of Claim to support contractors who have been forced to use umbrella companies reclaim unlawfully deducted employer's National Insurance contributions, the Apprenticeship Levy and underpayments of annual leave. Unfortunately, umbrella companies often receive bad advice and the aim of Umbrella Company Freeclaims is to allow contractors who have suffered abuse from "non-compliant" umbrella companies to obtain redress without incurring expensive legal fees or risk from high court litigation.
In a recent article in LinkedIn, The Law Place Limited's director set out the law regarding umbrella companies. Contractors using umbrella companies sometimes find that employer's National Insurance contributions have been unlawfully deducted from payment owing by the umbrella company. Technically an unlawful deduction from wages has not occurred when employer's National Insurance contributions have been taken from the rate charged by the umbrella company to the recruiter (sometimes called the "assignment rate" by anyone but lawyers) as covered by HMRC in their non-statutory guidance note ESM2390. Nevertheless, The Law Place Limited regards the practice advocated by HMRC as unethical and employer's National Insurance contributions should be paid by the recruiter's client (i.e. the hirer).
The Particulars of Claim also covers underpayment of annual leave, payment for annual leave on a rolled-up basis and non-payment of annual leave upon termination of employment. Let's be absolutely clear; it's never acceptable for payment to be made on a rolled-up basis.
The Particulars of Claim are to be used for claims in the Employment Tribunal with form ET1 and a grievance letter must be sent to the umbrella company before a claim to avoid a reduction in the award if your claim succeeds. The time limit for starting a claim in the Employment Tribunal is 3 months less 1 day from termination of employment or 3 months from the date of the last deduction. The Particulars of Claim are intended to be attached to an ET1 claim form and must be supported by evidence including the written contract of employment and a Schedule of Loss (ideally prepared by an accountant). The Schedule of Loss must show that the deductions of employer's National Insurance contributions have been taken from the gross amount payable and not the assignment rate charged by the umbrella company to the recruiter (or client if the engagement is direct). The Schedule of Loss must clearly particularise the losses.
Simply download the Particulars of Claim, fill in the areas in square brackets and delete the passages that are not relevant.
If you require advice regarding the Particulars of Claim or your claim generally, the standard rate of £150 per hour applies. If you have a question about the Particulars of Claim please use the contact form to arrange a paid phone call. Pro bono assistance may be available if you are currently receiving JSA or income related ESA. Alternatively, please consult Citizens' Advice.
This free offering does not in any way constitute legal advice and The Law Place Limited accepts no liability for use or misuse of the Particulars of Claim.
Introducing the Consultancy Project Agreement – a solution to the off-payroll legislation for consultancies
The new Consultancy Project Agreement package provides an innovative solution to the off-payroll legislation for consultancies engaging limited company contractors to deliver projects for the benefit of their clients.
The 'statement of work' model has been touted as a possible solution; however, this does not work unless (a) the contract terms are drafted by an expert in IR35 law and (b) the contracts for the limited company contractor and client contain mirroring provisions. For example, substitution can only work if the provision is enforceable throughout the contractual matrix.
We are aware of many statement of work type contracts which describe the services as a role and create control over the limited company contractor. Such contracts are utterly useless.
The Consultancy Project Agreement's author, Martyn Valentine LLB (Hons), has over 15 years of unblemished experience in advising thousands of consultancies, contractors and recruiters on IR35 matters.
The Consultancy Project Agreement is not an adapted recruitment contract – it's commercially balanced and eliminates risk in respect of both IR35 and the new off-payroll legislation.
How it works:
The Consultancy Project Agreement package consists of four parts –
-An agreement between the individual limited company contractor and consultancy providing maximum protection for all IR35 issues;
-An agreement between the consultancy and client containing mirroring provisions and commercial protection for the consultancy;
-An Assignment Schedule for the client setting out details of the overall project;
-An Assignment Schedule for the limited company contractor containing a definition of the services to be provided as part of the overall project.
The background law:
Chapter 10 Income Tax (Earnings and Pensions) Act 2003 defines the client as the party which receives the worker's services. This enables a consultancy to be defined as the 'client' irrespective of the fact that the consultancy has been engaged to deliver a project to its client.
While the draft legislation extends the scope of Chapter 10 to medium and large clients, an exemption has been created for clients which fall within the definition of a small company.
The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements:
-1. Turnover of not more than £10.2 million;
-2. Balance sheet total of not more than 5.1 million;
-3. Less than 50 employees (not including contractors).
As a result, a consultancy meeting the above qualifying conditions will be exempt from the off-payroll legislation. Responsibility for assessing whether the IR35 legislation applies to the engagement remains with the limited company contractor, therefore, saving administrative costs and risk. As you are treated as the client meeting the small company exemption your client does not need to incur the risk of employment tribunal cases, compliance with the Agency Worker Regulations 2010 or litigation arising from the use of unregulated umbrella companies.
Contact us now on 07788 773871, 01323 479709 or firstname.lastname@example.org for information on pricing. The Consultancy Project Agreement can be adapted for your needs and prepared at short notice.
Remember, dealing with umbrella companies and employees is fraught with risk:
-Umbrella companies often illegally deduct employer's National Insurance contributions
-Umbrella companies offer nothing that a cheap payroll company can't provide for a fraction of the cost
-Employees can claim for many rights in the employment tribunal
-The administrative burden of complying the Agency Worker Regulations 2010
-The Equality Act 2010 applies to employees and workers – the employment tribunal is not restricted in the damages it can award to a claimant
-Do you really need the expense of a human resources department?
We have noticed a disturbing trend among recruiters who are forcing contractors to use umbrella companies as a condition of providing working finding services.
All too often, recruiters are making the provision of work-finding services conditional on the use of an umbrella or choice of umbrella companies.
Other than allegations regarding the Bribery Act 2010, it is understood that clients engaging contractors have bought into the fallacy that umbrella companies insulate them from employment tribunal claims.
Why is this wrong?
This practice amounts to charging for work-finding services. This is a criminal offence and is a matter for the Crown Prosecution Service. The Employment Agencies Act 1973 prohibits any direct or indirect charge for work-finding services.
The Conduct of Employment Agencies and Employment Businesses Regulations 2003 prohibits this practice and creates a right to claim damages in the county court for all fees and consequential losses including underpaid holiday pay, unlawful deduction of employer's National Insurance contributions and the Apprenticeship Levy. There is no reason to be forced to pay an umbrella company £20 - £40 per timesheet.
There are also allegations that certain umbrella companies may have questions to answer about the Bribery Act 2010 given that being on a 'preferred supplier list' is a virtually guaranteed source of income.
What should work-seekers do?
Contact The Law Place on 07788 773871 or email@example.com. We are considering various options for contractors to share costs.
DO NOT OPT-OUT OF THE CONDUCT OF EMPLOYMENT AGENCIES AND EMPLOYMENT BUSINESSES REGULATIONS 2003 UNLESS YOU CAN OPERATE OUTSIDE IR35 AND HAVE RECEIVED INDEPENDENT LEGAL ADVICE.
Unless you want to pay an umbrella company £20 - £40 per timesheet when payroll must be provided without charge by the recruiter you should either decline the offer of an engagement made under such circumstances or insist on your rights.
A recruiter is not liable if it provides a work-seeker with the choice of processing the payroll internally or a choice of umbrella companies as required by s.44(2) Income Tax (Earnings and Pensions) Act 2003.
Contact us if you have been forced to use an umbrella company.
Today the Chancellor confirmed that the extension of last year's reforms to IR35 will not be extended to the private sector until April 2020. This decision was based on the consultation process and representations from MPs. From April 2020, responsibility 'for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker' (para 3.8). The reforms would eventually affect only 'medium and large' businesses without providing a definition. For small businesses it is presumed that the existing Chapter 8 IR35 rules will continue.
This is welcome news for professional contractors who rightly feared that the haphazard and ill-conceived implementation of the reforms to the public sector would create chaos in the private sector and lead to reduced pay. The Law Place Limited's director, Martyn Valentine, has assisted in research with ContractorCalculator which identified serious issues with HM Revenue & Customs' CEST tool and it is hoped that the delay will allow for HM Revenue & Customs to see sense and reconsider its approach to assessing employment status.
The delay creates an opportunity to lobby the government to abolish the reforms and avoid creating another burden for the private sector. Implementation of the reforms will involve significant expenditure on training, especially for HR departments which tend to have little idea as to the distinction between a genuinely self-employed professional contractor and an agency worker.
Please contact The Law Place Limited on 07788 773871 or firstname.lastname@example.org for more information.
Recently, there has been a spate of complaints by contractors about umbrella companies and employment businesses who are deducting employer's national insurance contributions where the client is a public authority and the new 'off-payroll' (i.e. Income Tax (Earnings and Pensions) Act 2003 Chapter 10) rules apply.
In other words, the public authority client has decided that the engagement constitutes deemed employment and the party below the public authority client in the payment chain, usually an employment business, has wrongly deducted employer's national insurance contributions from the 'deemed direct payment' owing to the contractor.
This despicable practice is prohibited by statute and evidence suggests that employment businesses and umbrella companies are 'skimming off' employer's national insurance contributions resulting in significantly less income payable to contractors. Where the off-payroll rules apply a public authority client must account to HM Revenue & Customs for employer's national insurance contributions separately and not as a deduction from the fees owing to the contractor.
This is precisely the same as for any employee; after all, if you're an employee and notice on your payslip that a deduction has been made for employer's national insurance contributions your response is likely to be unprintable. The warning signs for contractors include ambiguous statements concerning 'deductions' in the contract of employment with an umbrella company and payments for odd amounts.
The consequences for an employment business or umbrella company unlawfully deducting employment contributions are dire. HM Revenue & Customs in the first instance will claim any underpayment in national insurance contributions plus interest and penalties. Further, if the off-payroll rules genuinely apply then the contractor is likely to succeed in a claim for unlawful deductions from wages against the umbrella company in the employment tribunal. This is likely where 'services' description in the contract simply refers to a job title such as speech therapist. It is predicted that in the next 3-6 months a large proportion of umbrella companies will have been liquidated.
As the recent case of Elbourn demonstrates, the employment tribunal can effectively reverse an incorrect status decision caused by using the much-maligned CEST tool (or otherwise) where the contractor claiming unlawful deductions from wages is truly self-employed for the engagement in question and, therefore, does not fall within the tribunal's jurisdiction (s.230 Employment Rights Act 1996). The only defence for an umbrella company facing a claim for unlawful deduction from wages is to show that the public authority client is a customer of a business carried on by the individual and therefore the off-payroll rules don't apply. The contractor would then be entitled to payment gross of tax under s.44 Income Tax (Earnings and Pensions) Act 2003 from the outset of the engagement. This is clearly invidious for umbrella companies.
Where a contractor has been told by a public authority client that the off-payroll rules apply the best option is to insist on being supplied by the employment business as an Agency Worker and not to sign an opt-out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003. This avoids any misunderstanding as to a contractor's rights under the Agency Worker Regulations 2010.
Let's be clear, there is no legal basis for using an umbrella company and it is unlawful for an employment business to insist or otherwise make a condition of providing work-finding services that a contractor uses a particular umbrella company which involves any form of payment or deduction from wages. In fact, a contractor in this unfortunate position would be entitled to compensation and the employment business would be investigated by the Employment Agencies Standards Inspectorate. Where financial inducements have been offered by an umbrella company to an employment business criminal penalties under the Bribery Act 2010 may apply.
Since 2003 employment businesses have been prohibited from adopting this practice. Where an employment business has attempted to force a contractor to sign an opt-out notice where there is no advantage for the contractor and the employment business wants to use a particular umbrella company it is open for the courts to strike down such a notice.
If you have any questions please send an email to email@example.com or call us on 07788 773871.
(Originally published here: https://www.contractorcalculator.co.uk/cest_assessment_rejected_judge_545010_news.aspx - includes a contribution from The Law Place Limited's director Martyn Valentine)
A contractor has successfully used an employment tribunal to prove their outside IR35 status and reclaim thousands in overpaid tax, in a case during which the tribunal Judge ruled Elbourn was self-employed. This decision contradicted the result previously given using HMRC’s Check Employment Status for Tax (CEST) tool, which had wrongly concluded that IR35 applied to his engagement.
Mr Elbourn appealed to the tax tribunal for unlawful deduction of wages, during an engagement with agency Qualserve Consulting Ltd and end-client the Met Office, on the basis that employers National Insurance contributions should not have been deducted from his rate.
However, Mr Elbourn lost his appeal on the basis that he was found to be neither an employee, nor a worker, but self-employed – meaning IR35 could not have applied to the engagement.
However, in securing legal proof of his employment status, Elbourn managed to prove that an estimated £9,500 was wrongly deducted from his income by the client and agency, who treated him as ‘employed for tax purposes’ under the Off-Payroll rules. As a result, the respondents are compelled to repay the sum deducted.
Qualserve had made the decision to tax Elbourn accordingly with a CEST assessment, which had found him within scope of the rules. An evaluation which was wholly rejected by Judge O’Rourke, who concluded: “He [Elbourn] was given a project and, apart from a weekly meeting to check on progress, he was his own master.”
“This case marks a hammer blow for HMRC,” comments ContractorCalculator CEO, Dave Chaplin. “CEST’s accuracy has once again been called into question, in a case where the contractor’s self-employed status was never in doubt.
“Moreover, the case has presented thousands more contractors, who have been overtaxed due to Off-Payroll, with a straightforward means of recouping what is rightfully theirs.
“Bizarrely, in this case, even though the client had decided using CEST, that he was a “deemed employee”, they then put up a defence claiming that he was in fact self-employed. Whatever the Judge decided Elbourn would effectively win. Either he would be found outside IR35, or be found to be an employee or worker, in which case the employers NI would have been an unlawful deduction.”
‘The Elbourn defence’: background
In August 2017, Elbourn reached an agreement in principle on a three-month contract with the Met Office and was referred to Qualserve after enquiring about the contractual position of the engagement.
In the meantime, the Met Office completed a CEST assessment without a copy of Elbourn’s contract to hand. Instead, it based its assessment on what Elbourn describes as ‘a boilerplate business analyst job description’, a practice which is actively encouraged by the taxman, as the recent emergence of an HMRC webinar on IR35 has shown.
CEST found him to be within IR35, which led to a dispute between Elbourn and Qualserve over employer’s NI, which Qualserve insisted be deducted from Elbourn’s rate. Despite this, Elbourn and his limited company entered into a contract with Qualserve to provide services to the Met Office in September 2017.
Continuing to work for several months while suffering excessive tax deductions, Elbourn’s contract was eventually terminated in January 2018, and he presented a claim under s.230 of the Employment Rights Act 1996 in March 2018.
Though Elbourn failed with his claim, the ruling shows that his limited company should have been paid without deduction of tax from the outset, on the basis that Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 (the Off-Payroll rules) did not apply. As a result, Elbourn is awaiting a refund of roughly £9,500, including an estimated £3,300 in unlawfully deducted employer’s NI.
“The claim was always going to fail, for the simple fact that Elbourn’s contract and working practices pointed conclusively towards a contract for services. But that was the whole point,” notes Chaplin. “Submitting an employment tribunal claim is free and, as this case has shown, can be used to secure almost undeniable proof over an individual’s IR35 status.”
Elbourn judgment could prove catalyst for further claims
This is a tactic which we understand has only been used once before, by IT contractor John Williams in the case Williams v Hewlett Packard Ltd & Anor (2002). However, Martyn Valentine, director of IR35 specialists The Law Place – who advised Elbourn – believes this outcome could open the floodgates for many similar claims:
“It’s surprising that this route has only been rarely experimented with before. Obviously, use of the employment tribunal system would appear contrary to normal thinking for a contractor who typically goes to lengths to prove their outside IR35 status.
“But, as this case has shown, it can be used to help secure fair tax treatment for contractors who really have nothing to lose. If the Judge decides that they are self-employed, they will be outside IR35 and receive a refund of overpaid tax. If the Judge deems them to be employed, then they at least manage to secure employment rights. This could prove the catalyst for many similar claims.”
CEST assessment rejected by Judge
In a webinar delivered to NHS Trusts, HMRC’s IR35 policy advisor Mark Frampton stated that the client “is often best placed to judge whether the person would have been an employee or self-employed”. According to Chaplin, this outcome provides irrefutable proof that this is not true:
“The client aided – or rather hindered – by CEST, arrived at an assessment which was directly opposed to that reached by an employment tribunal Judge. It goes to show that end hirers are not well informed enough to make accurate status decisions, especially when they are encouraged by HMRC to overlook the individual contract and working practices.”
Chaplin adds: “Though HMRC continues to champion CEST’s accuracy, we now have the first of what I expect to be many cases where a Judge makes a status decision that contradicts CEST. This case adds to the mound of evidence already available demonstrating that HMRC’s tool is woefully inaccurate.”
Tribunal ruling ‘a serious issue for HMRC’
While great news for contractors, this outcome will surely prove disastrous for HMRC, as well as non-compliant contractor clients and agencies, as Valentine explains:
“This exposes a seismic hole in the legislation. It’s a serious issue for HMRC concerning the drafting of Chapter 10 that a contractor can make an employment status claim when outside IR35, potentially forcing the respondent to argue a position that puts them in jeopardy of having to refund significant deductions from the contractor’s income.
“The judicial impact could be considerable when you think about the costs that public authorities incur when defending against these cases. Then you consider that HMRC would have to refund the tax deducted by respondents who will have to pay the contractors. This could get very messy, very quickly for HMRC, but it will be a mess of its own making.”
He concludes: “This should also serve as a stern warning to clients and agencies who are happy to enforce incorrect tax treatment on contractors, and who fail to carry out a proper status assessment.”
PUBLISHED BY CONTRACTOR CALCULATOR
A plumber has successfully defended his employment status in the Supreme Court, after Pimlico Plumbers failed in its latest attempt to overturn a tribunal outcome from 2011. The Supreme Court rejected an appeal from the plumbing firm, which had argued that respondent Gary Smith was an independent contractor during his time with the company.
Smith was dismissed by the firm in 2011, after requesting to work part-time following a heart attack. However, later that year, Smith succeeded in bringing claims against Pimlico for disability discrimination and basic workers’ rights. His eligibility for this hinged on the Court’s interpretation that he had been engaged as a ‘worker’, rather than self-employed.
The ruling looks likely to add clarity to the issue of employment rights within the gig economy. More significantly for contractors, it is also the latest in a succession of tribunal cases which have reaffirmed the flaws in HMRC’s interpretation of mutuality of obligation (MOO), and its Check Employment Status for Tax (CEST) tool.
Supreme Court ruling contradicts HMRC’s MOO position
The Court deliberated over whether Smith’s contract with Pimlico cast obligations on him during periods between work assignments offered by Pimlico, or only during his performance of these assignments.
In making their deliberation, Lord Nicholas Wilson and his colleagues referred to Windle v Secretary of State for Justice (2016), referencing Underhill LJ’s statement that: “a person’s lack of contractual obligation between assignments might indicate a lack of subordination consistent with the other party being no more than his client or customer.”
Lord Wilson ultimately upheld previous judgments, stating that, although Pimlico had no obligation to provide Smith with work on days where there simply wasn’t work available “it would seem hard to understand why, in the normal course of events, Pimlico would not be content to be obliged to offer work to him.”
Legal expert calls on HMRC to forget CEST
“The fact that the Supreme Court considered MOO alone reinforces the fact that CEST is not fit for purpose,” notes ContractorCalculator CEO, Dave Chaplin. “But the clear distinction made here between the ongoing obligations in an employment relationship and the temporary obligations in a contractor arrangement is what really buries HMRC.”
“The judgment reaffirms the crucial importance of MOO in determining employment status,” adds Martyn Valentine, director of The Law Place. “The Supreme Court’s judgment followed earlier judgments relevant to IR35, and specifically mutuality of obligation, such as Usetech, and is binding in lower courts.
“Therefore, HMRC’s policy of disregarding the question of whether sufficient mutuality of obligation for a relationship of employment has arisen is indefensible, and vulnerable to judicial review. It’s time for HMRC to forget CEST before it becomes a nightmare.”
Hattrick of rulings leaves HMRC with nowhere to turn
“Though, in this case, the intentions of the parties are reversed, with Smith defending his status as a worker rather than a contractor, the same rules apply when considering IR35,” comments Chaplin.
“This ruling is the third to emerge in a matter of months, which decisively refutes HMRC’s assumption that MOO is inherent in every engagement simply by there being a contract in place. This assumption underpins CEST and has subsequently resulted in thousands of public-sector contractors receiving inaccurate status assessments.”
Chaplin concludes: “The body of evidence proving CEST’s flaws is simply too large for the taxman to continue to ignore. The longer HMRC goes without acknowledging its mistakes, the more people will continue to call its integrity into question.”
Christa Ackroyd Media Limited v. HMRC - Stunning £400,000 Victory for HMRC Spells Anxious Times for Contractors
In the first IR35 judgment issued for 7 years the First-Tier Tribunal has decided in favour of HMRC resulting in a colossal liability for the appellant. Unsurprisingly, an examination of the facts and reasons behind the judgment illustrate once again the perils of failing to obtain competent legal advice prior to the start of an engagement. Further, the judgment exemplifies the need for equality of representation in a Tribunal hearing, notwithstanding that the facts strongly pointed towards employment.
Ms Christa Ackroyd had a long employment history with the BBC as a television presenter before providing services to via CAM Limited to BBC 1 from 2001 until termination of the Contract in 2013. Although not a lead case for a number of other similar appeals, it is part of HMRC's policy of targeting television presenters operating through personal service companies and shows a re-invigorated approach to IR35 enforcement.
Of note, HMRC declined both to interview Ms Ackroyd before expressing their initial opinion on IR35 status (para 19) and interview persons connected with the BBC who would corroborate her evidence (para 38), but her representative did not call such witnesses.
The judgment considered the key aspects of control, mutuality of obligations and substitution:
Ms Ackroyd had some influence over how Look North was presented (para 71) and a high degree of autonomy in carrying out her work (para 88), but no control over the programme itself (para 27) and the BBC retained "editorial responsibility" in line with its Editorial Guidelines. The Editorial Guidelines were evidence of an overall right of control if not contractually binding (para 108) and breach of the Editorial Guidelines were used to justify termination of the Contract (para 127). It would not have been realistic for Ms Ackroyd to breach the Editorial Guidelines without consequence.
The BBC required Ms Ackroyd to obtain their prior written consent before she could work for anyone else (paras 30 and 47) like an employee and she was not proactive in obtaining other work (para 80) to demonstrate a right to profit by sound management.
The BBC retained a right to specify what services Ms Ackroyd would provide on an ongoing basis within her "role" as a presenter. The BBC retained an ultimate right of control as a matter of contract (para 165) and to ensure compliance with the Editorial Guidelines.
Whereas there were no set hours, the requirement to work 225 days per year left little time for working for others (para 45).
Mutuality of obligations
The Contract provided for a fixed term of 7 years but could be terminated (paras 39 and 171) and the BBC retained "first call" on her services for 225 days per year (para 40). Judge Cannan cited ABC News Intercontinental Inc v Gizbert EAT (21 August 2006) (unreported) as a precedent for founding mutuality of obligations on the basis of a fixed-term contract (amongst other factors) with a minimum number of hours. Ms Ackroyd's work at the BBC was "pursuant to a highly stable, regular and continuous arrangement" (para 170).
The BBC were required to pay CAM Limited's fees even if they did not call upon Ms Ackroyd's services (paras 51 and 151) and paid regularly each year (para 56). This point was decisive in Usetech Limited (para 133).
The question of the extent to which the taxpayer is dependent on a particular client is a relevant factor (para 146) plus whether he/she can provide services to a "wider market".
Despite the drafting of the IR35 legislation the Contract excluded substitution of Ms Ackroyd. Applying Usetech Limited, the existence of an unused right to substitute is not in itself determinative of self-employment (para 142). The absence of a right to substitute was a pointer towards employment (para 168), however, substitution would have been an unrealistic proposition given the unusual fact that the BBC required Ms Ackroyd's personal services as a presenter rather than the supply of agreed services as in all other typical contracts involving personal service companies.
- Ms Ackroyd was entitled to £3,000 per year expenses allowance for "suitable clothing" (para 46).
- The fact that Ms Ackroyd received no employee benefits such as sick leave was purely a consequence of being employed by CAM Limited (para 53).
- Of significance Judge Cannan stated (obiter) that "it is not appropriate to adopt a mechanistic or 'check list' approach" but instead to take a stand back approach. It can be inferred that relying exclusively on the flawed CEST without legal advice is a recipe for disaster.
- There was little evidence of Ms Ackroyd being in business on her own account and was economically dependent" on the Contract with the BBC (para 176).
This judgment provides useful guidance for contractors, but care must be taken as the facts are not wholly applicable for the majority of contractors using personal service companies.
The IR35 legislation requires cases to be assessed on their own facts and it would be criminally negligent to disregard the statutory significance of substitution following what is, after all, a first instance judgment affecting a very narrow sector. This judgment does not create a binding precedent.
For contractors it is useful to bear in mind the following facts:
Control - consider the existence of any pervasive rights of control such as the client's policy and procedure documents. This judgment shows once again that the burden of proof is on the appellant to show that he/she is not subject to a pervasive right of supervision, direction or control. Applying Autoclenz, the contract must not contain a right of control over the contractor. The task of the representative is to prove a negative.
Mutuality of obligations - a fixed-term engagement guaranteeing a minimum number of hours provides the minimum pre-requisite for employment. Similarly, a long term engagement shows that the contractor is economically dependent on the client and is likely to be part and parcel of the client's organisation, e.g. Ms Ackroyd being on the BBC's mailing list and attending training sessions.
Substitution - is essential and the judgment cannot be relied upon given the unusual facts of the case. The BBC required a newsreader not delivery of an IT project where the identity of the individual is of lesser importance.
In summary, this judgment presents an unusual set of facts but provides a useful review of the leading judgments. This judgment illustrates plainly HMRC's hypocrisy in disregarding mutuality of obligations from its own CEST Tool but gleefully relying on Usetech Limited to persuade the Tribunal that IR35 should apply to CAM Limited.
Crucially, the conduct of CAM Limited's representatives and HMRC is a stark reminder that it is essential to (1) obtain competent legal advice prior to the start of an engagement; (2) use an experienced barrister or Queen's Counsel in conducting an appeal; (3) to confine all contact with HMRC to correspondence which can later be relied upon; and (4) do not forgo opportunities to issue witness summons - HMRC won't do you any favours.
The BBC does not emerge unscathed as it bears moral responsibility for encouraging Ms Ackroyd to use a personal service company for its own commercial advantage in the context of a contract and working practices which overwhelmingly confirm that IR35 should have applied from the outset.
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