IR35: MBF Design Services v HMRC – key facts from the case for contractors to note

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Contractor Mark Fitzpatrick’s limited company MBF Design Services has been completely exonerated of any liability under IR35 by a first-tier tax tribunal. The facts reveal that HMRC’s case was weak from the start and should never have been pursued. That is possibly why HMRC resorted to writing one witness statement and coming under suspicion for incorrectly representing two others.

According to the ruling by Tribunal Judge Malachy Cornwell-Kelly, Fitzpatrick was clearly not a disguised employee of client Airbus and his contracts were found to be outside IR35. “The parties’ plain intention, shown both in the contracts and in practical ways, was not to create an employment relationship,” said Judge Cornwell-Kelly.

The ruling also reveals that a key witness for HMRC had had his statement prepared by inspectors, while two other witness statements were disallowed by the judge because they “were disputed as to their contents, which related to issues central to the appeal.”

Contractual terms clearly suggested no employment

There were a number of key clauses in the contracts between MBF Design Services and the intermediaries GED-Sitec and Morson that put the contract well outside IR35. These included:

  • A clause stating that poor attendance or substandard work would result in payment being withheld
  • A contractual requirement that ‘operatives are suitably trained and qualified at the cost of MBF Design Services
  • That MBF Design Services must “rectify at its own cost any defective work it carries out”
  • A requirement for professional indemnity insurance
  • A specific clause stating that Airbus did not control or direct its contractors
  • A short termination period of only 7 days on one contract, and termination with immediate effect on another
  • GED-Sitec was not obliged to provide any named individuals, although Fitzpatrick was named on one of the contract schedules.

There was also a right of substitution clause, although Fitzpatrick had never tried to exercise his right to offer a substitute.

Working arrangements were not those of an employee

With the exception of one training course supplied by Airbus on software that the contractor had to use to be consistent with the client’s operating requirements, the working arrangements were clearly not those of an employee. Fitzpatrick coordinated his holidays with the client’s requirements, but Airbus did not control when he took them, and when the contractor was unavailable through holiday, Airbus simply used another engineer.

Aside from a single example, Fitzpatrick trained himself at his own expense and kept his own hours, except where required by the client’s working arrangements. He was also sent home alongside other contractors when the computers went down, while employees were required to remain at their desks even though they could not work.

Fitzpatrick was clearly not controlled and had refused offers of work from Airbus when the rates did not meet his requirements; he also refused the opportunity to take on a project lead role. He was identified as a contractor on his security pass and was not invited to participate in employee social events; nor did he receive any of the 25 benefits available to staff.

HMRC’s evidence discredited

The evidence from one key HMRC witness, Mr Minh Pham, was discredited by the judge because it had been prepared by HMRC. Judge Cornwell-Kelly said: “He admitted that his witness statement had been prepared for him by HMRC and he had considerable difficulty – due apparently to a limited command of English – in reading it out.”

The judge went on to disallow two additional witness statements from Airbus executives that had been supplied by HMRC because the witnesses themselves were not summoned to testify and undergo cross-examination. The judge clearly doubted the content of the statements, saying they were “disputed as to their contents.”

He admitted that his witness statement had been prepared for him by HMRC

Judge Malachy Cornwell-Kelly

HMRC had contended that the “right to terminate on 7 days’ notice is characteristic of an employment contract”, which is clearly not the case. HMRC also stated that mutuality of obligation applied because “work was always available for Mr Fitzpatrick and he was always paid for it”, despite the fact that he and other contractors were sent home without pay when the power failed and the computers did not work.

Key factors of the ruling

The judge identified a number of factors which led to his decision to rule in favour of the contractor. These included:

  • ‘No notice’ termination clause in one of the contracts, which he described as “quite foreign for the world of employment”
  • Fitzpatrick paid for his own training, with one exception, and was not named on some of the contracts
  • Both the written and oral evidence confirmed the contractor was not controlled and had the right of substitution, which could have been exercised
  • Contractors worked on specific projects and did not have a specified role within Airbus, and Fitzpatrick had specifically declined offers of work from Airbus
  • Fitzpatrick is clearly an expert professional, and his “status as a freelance specialist…is entirely credible”
  • Contractors had no disciplinary or grievance procedure and had to rectify errors at their own expense
  • The work had to be done on site with the client’s equipment because “there was no other sensible way to do it”.

With there being such overwhelming evidence that Fitzpatrick was a genuine contractor outside IR35 and not a disguised employee, it strongly suggests that HMRC should never have attempted to pursue this case.

If HMRC created a dedicated task force of IR35 specialists with expert knowledge of employment law, as has been proposed as part of ContractorCalculator’s IR35 Solutions series, it is very possible that this case would not have been taken on, saving the taxpayer considerable sums of money, and saving an innocent contractor from tremendous stress and expense.

And the fact that HMRC had ‘prepared’ at least one witness statement demonstrates that, not only was the case weak from the outset, but as an organisation it clearly considers itself to be outside of the rules that govern the behaviour of other publicly funded and accountable organisations.


Alliance Accountants

Published: Monday, February 07, 2011

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