Rechtsanwalt, Partner, Head of Employment & Reward, Germany
Out-Law Legal Update | 06 Dec 2019 | 9:32 am | 5 min. read
An IT contractor was not subject to IR35 rules because there was not sufficient 'mutuality of obligation', the UK's First-tier Tribunal (FTT) has decided.
The IT contractor operated through a personal service company (PSC) and had no right to be provided with work every day during the course of an assignment. The FTT said he was not subject to the IR35 employment intermediaries rules because there was insufficient mutuality of obligation.
"It is good to see the FTT deciding a case in a taxpayer's favour on the basis of mutuality of obligations. HMRC have been known to take a very limited view of this test effectively saying that if an individual performs services and is paid for them mutuality exists, regardless of whether the arrangements mean the individual is required to be provided with work," said Chris Thomas, an employment tax expert at Pinsent Masons, the law firm behind Out-law.
The employment intermediaries rules, known as IR35, require that employment taxes and national insurance contributions (NICs) be paid in respect of a person who provides services through a PSC if that person would have been regarded as an employee of the engaging business if they had engaged directly with the business.
The case concerned Richard Alcock and his company RALC Consulting Limited (RALC). RALC contracted through an agency to provide Alcock's services to his former employer, Accenture, the management consultancy and to the Department of Work and Pensions (DWP). HM Revenue & Customs (HMRC) claimed that RALC should have paid employment taxes under the IR35 rules on the basis that if Alcock had been engaged directly by Accenture or the DWP he would have been an employee.
In a 1968 case involving Ready Mixed Concrete the judge set out three conditions that needed to be satisfied for there to be a contract of employment. The first is that there is mutuality of obligation for the worker to perform work offered and the engager to pay remuneration. The worker must also be obliged to perform the work personally. The second condition is that expressly or impliedly, the individual agrees that in the performance of that service he will be subject to the other’s control "in a sufficient degree to make that other master". The third condition is that the other provisions of the contract are consistent with its being a contract of employment.
RALC argued that these conditions were not satisfied in Alcock 's case.
The FTT found that there was no express contractual obligation upon Accenture to provide work on each working day during the course of an assignment. It did not accept HMRC’s submission that the long history of Alcock’s work for Accenture as an employee and operation of the contract in practice led to an expectation that Alcock would be provided with work by Accenture every business day during the course of an assignment, unless agreed otherwise, such that it crystallised into a legal obligation.
The FTT accepted that that Alcock could only work and be paid if work was available which could be cancelled at any time. In fact in 2013 Accenture terminated a contract with RALC, four months before the end of its fixed term and Alcock worked for 10 days in January 2013 without payment, in the hope of a contract extension but bore the cost of having worked without payment when the contract was not extended.
"The Tribunal is not satisfied on balance that sufficient mutuality of obligations did exist between Alcock and the end clients in the notional contracts to establish an employment relationship. Alcock and [RALC] have discharged their burden of proof on the balance of probabilities in establishing a lack of mutuality of obligations sufficient to form an employment relationship with the end clients. Although there was some mutuality of obligations in respect of the requirement for payment if work was done, it did not extend beyond the irreducible minimum in any contract to provide services nor demonstrate the relationship was one of a contract of service," the judge said.
On the requirement to provide services personally, the FTT said that Alcock had not shown that the arrangements did not require Alcock to provide the services himself. Although Alcock had the contractual right to offer substitutes in all the contracts RALC entered into, the end clients had to approve the substitution and had the right to refuse if the substitute was deemed unsuitable. In addition the contracts between the agencies and the end clients further fettered the substitution rights and allowed the end client to refuse to accept a substitution for Alcock without giving reasons.
The FTT applied the comments of the Court of Appeal in its judgment concerning Pimlico Plumbers, where the court said that a right to substitute only with the consent of another person who has an absolute and unqualified discretion to withhold consent is consistent with personal performance, and therefore points towards an employment relationship.
In considering the degree of control exercise by the clients over Alcock , the FTT said there was a substantial degree of control by the clients over where and when Alcock worked, pointing towards employment.
However, the FTT said Alcock had substantial control in practice and as of right over how he was to perform his services for his clients and it said this outweighed the control the clients had over where and when Alcock worked.
"Assessing the matter qualitatively, by standing back and looking at the overall picture, the Tribunal is of the view that Alcock ’s significant right of control over what and how he worked for the end clients outweighed their right over where and when he worked," the FTT said.
Having considered the three stages of the test set out in the Ready Mixed Concrete case and considered all the relevant circumstances including 'painting the picture' and taking into account whether Alcock was in 'business on own account', the FTT said it was satisfied that the hypothetical contracts with Alcock 's end clients would be ones for services and therefore not caught by the IR35 legislation.
This case concerned tax liabilities for periods before April 2017. At that time the IR35 rules required that where a contractor was engaged through a PSC, liability to decide whether IR35 applied and to pay any employment taxes rested with the PSC. Since April 2017 where a public sector body engages workers through a PSC, responsibility for determining whether IR35 applies rests with the public sector engager.
Currently where the engager is in the private sector the responsibility for applying IR35 still falls on the PSC. However, the rules are due to change from 6 April 2020. From this date, engaging businesses are expected to be made liable for determining whether the IR35 rules apply and if necessary to operate PAYE and pay employers' NICs. The changes will not apply to small businesses which engage contractors through PSCs.
During the election campaign the main political parties have pledged to review the changes and so it is not currently clear whether they will definitely be introduced in April 2020. However, experts advise businesses to continue to prepare for the changes.
Rechtsanwalt, Partner, Head of Employment & Reward, Germany