Primary Path IR35 case: HMRC was predestined to lose case offering important lessons

IR35 Test

Contractor Phil Winfield was so clearly outside of IR35 and genuinely running an IT business via his limited company, Primary Path, that HMRC had virtually no chance of winning. This has been shown by the tax tribunal ruling by Judge Edward Sadler, which offers lessons to HMRC, contractors and members of the IR35 Forum.

The Judge concluded that “...we are clear that the picture we have of the relationship between GSK [Winfield’s client] and Mr Winfield is one of an independent and self-employed contractor, and not that of employer and employee.”

And, in demonstrating that Winfield failed all three key tests of employment – control, substitution and mutuality of obligation – Judge Sadler suggested that any contract which included a substitution clause is unlikely to be an employment contract.

In a blow against advocates of ‘in-business’ or ‘gateway’ tests to determine IR35 status, Judge Sadler added: “There is no simple formula or process which can be applied to determine, in any particular case, which factors are relevant or the weight or significance which is to be attributed to any factors which are considered to be relevant.”

Key facts of the ruling

  • A substitution clause was in place, mirrored by upper and lower level contracts, ie with the contractor’s client and agencies respectively
  • There was substantial evidence that the contractor was in business on his own account
  • The contractor, and his business, carried financial risk, such as irregular payment, fluctuating rates determined by market conditions and potential non-payment
  • Hourly and daily rates are indicative of a professional services supplier and not an employee
  • The contractor’s skills were so specialist that the client had no one of comparable skill, meaning that the contractor could not be controlled
  • No set hours, working from home and a clear project schedule contributed to the lack of control and mutuality of obligation.

Substitution: IR35’s new silver bullet?

In what may become a new precedent for employment status cases, as he pulled together the facts to construct the hypothetical contract required by IR35 legislation, Judge Sadler said: “…any contract which has at least some recognition that the provider of the services can supply a substitute in certain circumstances must seriously be considered as being a contract other than for employment.”

Not only did Winfield have a substitution clause in the contract between the two agencies he worked through and Primary Path (the lower level contract); both of the agencies also included a substitution clause in their contract with the client GSK (the upper level contract).

Although Winfield did not specifically offer a substitute to GSK, he had provided a substitute for other clients and had himself acted as a substitute for other contractors, evidence that the Judge felt worthy of mention.

HMRC did not acknowledge, or allow for, any of this evidence in its submissions to the tribunal, despite it clearly marking engineering contractor Winfield as not having a hypothetical employment contract with GSK.

Evidence of Control “points away from a contract of employment”

HMRC contended that GSK could control where and when Winfield’s work was to be done, and what he was to do, which in its view suggested that “GSK had sufficient rights of control to render the hypothetical contract one of employment.”

Winfield’s database integration skills are so specialist that the client GSK “had no employees with specialist knowledge in this field”. He could “determine his own working hours” and, on a day to day basis, “had a great deal of autonomy”.

Crucially, GSK could not tell the contractor how to perform his duties. And, in keeping his own hours, taking work home on his own laptop, and working autonomously, Winfield’s working practices led the Judge to conclude that the evidence on control “points away from a contract of employment”.

No obligations between client and contractor

Winfield worked an average working week of 37.5 hours for GSK and was paid only for the hours he worked. Judge Sadler identified that there was no evidence either in the contracts or in the actual working relationship between the contractor and client that anything more was expected from either party. He therefore concluded that mutuality was not present.

HMRC claimed that hourly pay is indicative of employment and that independent contractors charge fixed fees for specific projects. The Judge disagreed, stating that: “Remuneration by reference to hours worked at an hourly rate is, in the present world, a feature of the fee-charging structure of professional service firms.”

any contract which has at least some recognition that the provider of the services can supply a substitute in certain circumstances must seriously be considered as being a contract other than for employment

Judge Edward Sadler

If Winfield had been employed, he would be on a specific monthly salary, the Judge said. So the fact that the contractor was paid on an hourly basis pointed away from employment.

Other factors point to, or away from, employment

In considering the hypothetical contract that must be created by the Judge under the IR35 legislation, in addition to substitution, control and mutuality, “other terms of the contract should be consistent with its being an employment contract”.

There was a significant body of evidence suggesting otherwise, seemingly largely ignored by HMRC, which placed Winfield’s hypothetical contract well beyond being one of employment. The evidence included:

  • Winfield did not receive any of the benefits, such as pensions and bonuses, enjoyed by permanent employees working in the same project team
  • He did not receive sick pay or holiday pay from GSK
  • The contracts between Primary Path and the agencies, and between the agencies and GSK, clearly stated that Winfield was not an employee of GSK
  • Winfield’s company was required to hold professional indemnity and public liability insurance
  • The contracts specifically allowed Winfield to work simultaneously for other clients, which he did on several occasions
  • Primary Path maintained a well equipped home office and paid for Winfield’s training and membership of professional bodies
  • Primary Path had its own website and marketing materials, and Winfield marketed himself to agencies and via job boards
  • Payment of invoices by the agencies was erratic, varying between one and six weeks after invoice, and Winfield worked on speculative software development projects with other contractors
  • Hourly rates also fluctuated, and the second contract Winfield won with GSK was at a lower rate than the first.

Based on all of this evidence, Judge Sadler concluded that Winfield was clearly in business on his own account, and said:

“[Winfield] was exposed to financial risk in a manner and to an extent that Mr Winfield would not have been exposed to had he been an employee. Those risks are essentially the risks which are run by a self-employed worker. It is a definite pointer towards Mr Winfield being regarded as such in the assessment of his status which we are required to make.”

Judge Sadler has effectively created a checklist of compelling features that, if exhibited by a genuine contractor, HMRC would find difficult to refute.

All of this evidence was available to HMRC from the outset, yet it still pursued Winfield to a tax tribunal even though the evidence, when considered in the light of the requirements of IR35, meant that HMRC was destined to lose.


Alliance Accountants

Published: Wednesday, August 03, 2011

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