Press Room

Dragonfly case update

Special Commissioner’s decision

The Special Commissioner’s decision in December 2007 reached the following conclusions as to the nature of the hypothetical contract between Individual and Client:

1. There would be a series of contracts, each with a fixed term, and with no obligations on any party to renew.
2. Each contract would be terminable prematurely by either party on 28 days written notice without cause.
3. Each would also be terminable by written notice if the Individual’s performance was unsatisfactory.
4. Each would be for the Individual’s services; a substitute could be provided, but only if the Client had first notified acceptance of (a) the substitute, and (b) the period for which the substitute would be accepted.
5. The Individual would be engaged to undertake tasks allocated to him, within the framework of the project timetable, and subject to the guidance of the team and of its manager.
6. Payment would be made at a daily rate for the days actually worked.
7. For the first and third projects, most of the work would have been required to be done at the Client’s premises; for the second, it would have been required to be done at the Clients premises to the extent necessary to do the work only.
8. There would have been no provision for pension, holiday pay, or sick pay.
9. There would have been no provision for appraisal.

On the basis of those facts, the Special Commissioner then applied the law.

Case law referred to:

Ready Mixed Concrete 1968 – which refers to a contract of service existing in the event the ‘servant’ agrees to work for remuneration, and will be controlled by the client in performing these duties and finally that these services are consistent with a contact of service.

Montogmery vs Johnson 2001 – this case referred to mutual obligations between the client and the contractor and the perceived control over the work performed

Hall vs Lorimer 1993 – relates to running and operating a business.

Questions he raised:

(a) does the taxpayer provide his own equipment?
(b) does the taxpayer hire his own helpers?
(c) what degree of financial risk does the taxpayer bare and what opportunity for profit does the taxpayer have?
(d) what degree of responsibility for investment and management does the taxpayer have?
(e) is the taxpayer part and parcel of his “employer’s” organisation (see Hall v Lorimer);
(f) the degree of control to which the taxpayer is subject (rather than the mere existence of a right of `control’);
(g) termination provisions – termination on notice may be a pointer towards employment in some cases (it was found to be so in Morren v Swinton (1965) 1 WLR 576 but found to be neutral in McManus v Griffiths 1997 70 TC 218);
(h) the intention of the parties.

These are questions that we would suggest you consider when thinking about your contracts.

Tests performed by the Commissioner

He applied the various tests to the hypothetical contract as follows:

1. The Individual was to provide his own work and skill, for which the Client would be required to pay – and this was not undermined by the limited possibility/right of substitution.
2. The submission to guidance of the team and the team manager was enough to give rise to a sufficient right of control.
3. As to the other provisions of the contract, he took the following views:
   

• Very limited right of substitution not inconsistent with employment, did not point strongly away from it
• Degree of control as expected from a skilled professional employee, and pointed towards employment
• Intention of the parties as regards whether or not there was to be employment seemed irrelevant
• Nature of work required use of Client’s computer and premises, therefore not pointing towards employment; some ‘own equipment’ provided, pointing marginally away from employment
• Individual bore costs of training and phone lines – pointed weakly away from employment
• Work only undertaken for one other client, not a significant part of income; a weak pointer away from employment
• Ability to increase profit limited; risks of payment against invoice, but little economic risk; risk associated with no sick pay; negotiated higher and lower rates with state of market; weak pointers away from employment.

The Special Commissioner concluded that the individual would have been an employee, under the provisions of the hypothetical contract – and therefore that the engagements fell within the scope of IR35.

The appeal

1. Substitution – whilst the contract had the right to substitute the agency had to approve the replacement and this was never exercised.
2. Control – this appears to be the main reason for the loss because the contractor in the 1st contract (and it stated this in the contract) was under ‘direct supervision and control’ from the client
3. Intention – whilst it was clear that neither party intended employment the commissioner disregarded this fact!
4. Worker – although the contractor was not part of the organisation the commissioner still classified him as a worker and as such within IR35!

Conclusion and comments

It is clear that a series of ongoing contract extensions was one of the main flaws in this case and it is clear that overstaying your welcome at any one client and becoming integrated into the team creates an inherent risk for IR35.

I think in a perverse way HMRC also thought that by selecting a contract that started pre the IR35 legislation and rolled beyond the date IR35 was implemented that they may have expected to close this issue down 9 years ago!

Control over the work and duties is the key to this case being lost and thereafter mutual obligation to each other goes to emphasise that you should not take on an employment-type relationship.

Whilst this court loss is not welcome it does go to show that HMRC are still reviewing cases and we all need to be vigilant when considering status. This reinforces our view that getting proper legal advice is the best way to ensure that the end contractor contract mirrors the upper level contract with the client.

As we have detailed before we would recommend contacting Bauer & Cottrell if you wish to review your contracts moving forward. They provide an exceptional service and will be best placed to advise how your contract sits when considering IR35 and the recent court decisions.

In the event you have any questions at all please email them to info@rodliffeaccounting.com and we will be collating FAQ’s because we anticipate that we will have many questions.

Regards,

David Hughes
Managing Director