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.