A recent IR35 case has brought some welcome news to contractors, in a ruling that also saw the taxman criticised for the quality of the evidence produced.
Contractors subject to HMRC investigations have to rely on case law from previous IR35 judgements to establish their IR35 status. Most relevant case law focuses on contractor cases, but a new ruling on JL Windows and Doors on a mainstream employment law issue could have a positive impact on the contracting sector.
JL Windows and Doors provides labour on a subcontract basis to building firms, but HMRC contended that it was in fact the hidden employer of these subcontractors.
In the case heard before the Special Commissioners, HMRC was defeated by Dave Smith from Accountax, who demonstrated that the subcontractors used by JL Windows and Doors were not hidden employees.
Crucially, the Special Commissioner Mr John Clark, heavily criticised HMRC for its reliance for evidence of its own records of meetings with the firm under investigation. Clark said: “It was not possible to tell to what extent the answers given were the results of questions being put forward in such a way as to lead the interviewee to give answers in a particular form.”
This is an important point, because previous IR35 cases have been lost by contractors who felt that the taxman’s notes of meetings were far from accurate. Clark has now signalled that HMRC needs to provide much better evidence in future.
Key tests - no change
Clark applied the key IR35 and employment tests to assess the status of the subcontractors working on-site for JL Windows and Doors. These tests, succinctly summarised in a blog by Phil Richards of Blevins Franks, included:
- Mutuality of obligation (MOO)
- Control
- Personal service/substitution.
Richards highlights personal service, control and mutuality of obligation as ‘irreducible minimum’ requirements that must be present for the worker to be classed as an employee. The lack of any one of these factors means the worker is not employed, and Smith argued that all three factors were missing.
On the issue of mutuality of obligation, where an employer is obliged to find work for their employees, and the employees are obliged to complete the work, Clark found that MOO did exist within each specific contract, but could not be used to ‘establish the nature of the contract’.
It was control that became the deciding factor, above both MOO and the right of substitution, as Clarke ruled that: “JL Windows did not exercise a sufficient degree of control over the subcontractors to make itself master.”
Are ‘helpers’ substitutes?
Although the subcontractors quite clearly used helpers on-site and friends and family to cover contractors during holidays, with the full knowledge of JL Windows and Doors, Clarke did not see this as important.
His precise words were: “On the evidence the use of helpers can only be described as occasional. I do not see this as a significant factor in determining the nature of the contracts.”
This interpretation is worrying, because is seems to place a limit on how substitutes can qualify as substitutes. How often and for how long does a substitute need to work on a contract in order that, in the eyes of the courts and HMRC, they qualify as substitutes?
No insurance, no holidays, no sick pay
If the contractors did not turn up on site and work, they did not get paid. Similarly, they were not paid for periods of holiday or sickness. These indicators clearly point to a contract for services (outside IR35), as opposed to a contract of service (inside IR35).
Plus, when work was completed early, the subcontractors profited, also suggesting they were in business on their own account.
Clark found that because they did not have their own public liability insurance and relied on the policy held by JL Windows and Doors, this was less consistent with a contract for services.
As many limited company contractors are still working without the correct insurances, and some policies are a legal requirement for companies that are trading, contractors should address this issue as a matter of urgency. Not having the right insurances can be used as evidence that you are a hidden employee, not a contractor.
Leading questions
It was not possible to tell to what extent the answers given were the results of questions being put forward in such a way as to lead the interviewee to give answers in a particular form
John Clarke, Special Commissioner
HMRC’s dubious tactic of asking leading questions in meetings came under fire from Special Commissioner Clarke, who said that the notes of meetings between HMRC and JL Windows and Door basically could not be relied upon as evidence.
Although not disregarded completely, Clark used caution when deciding what weight to place on HMRC’s meeting reports in his assessment of the case.
So, what does this all mean for contractors? There are no earth-shaking precedents following this ruling, but some minor points were raised, particularly about the eligibility of substitutes and the use of HMRC’s uncontested evidence.
Contractors should still ensure they have contracts professionally reviewed for IR35, have contractor insurance in place that keeps them within the law, and should never even consider talking to HMRC without having professional advisers present.
Published: Monday, February 23, 2009
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