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Contractors may have more client clarity and less IR35 risk after Autoclenz ruling

Contractors may find that, following the Autoclenz Ltd v Belcher & Ors ruling, their clients start to work harder to justify why a contractor – rather than an employee – was required to fulfil an assignment. And this could help clarify a contractor’s status, reduce their IR35 risk and improve their classification as being ‘in business’.

Talking to ContractorCalculator, Professor Patricia Leighton, Emeritus Professor of Employment Law at the University of Glamorgan and Professor at the École Supérieure de Commerce à Paris et à Nice (Ipag), says that the implications of the case are potentially far-reaching.

Leighton is an influential figure in contractor client circles: she advises many of the UK’s leading human resources managers through the Capita Learning and Development’s PEEL Club. And she believes that contractors could directly benefit as a result of her advice to clients to introduce much tighter contractor hiring frameworks, clearly differentiating contractors from employees.

“HMRC has case law it can apply to effectively disregard written contracts between contractors and clients with little justification, and an ambiguous framework of ‘employment realities’ on which to base the resulting employment status decision,” she says. “But it is clients who potentially have the most to lose when contracts are disregarded as a result of workers claims for employment rights.”

Why the Autoclenz ruling caused a shock in legal circles

The Autoclenz v Belcher case centred on a team of car valeters seeking employment rights. They had contracts containing substitution clauses and dealing with the risk of mutuality of obligation. Supreme Court Judge Lord Clarke, together with a panel of four other judges, disregarded the contracts and confirmed that the 20 car valeters were actually employees.

“The Autoclenz case is of great interest to employment law practitioners for two reasons,” says Leighton. “Firstly, creating a hypothetical contract had previously been restricted to scenarios when no contract has been in place, such as between a temporary worker supplied by an agency and their end-client.

“Secondly, the written contracts were disregarded following only a superficial consideration of the rules and precedents relating to ‘sham’ contracts, followed by an employment status ruling that was based on what were referred to as ‘employment realities’.”

Leighton highlights that these ‘employment realities’ are determined by the legal tests of employment which, being based on an increasing body of case law that fluctuates in importance over time, can lead to great uncertainty.

“This makes planning and managing relationships especially hard,” she adds. “Should the nature of the relationship be based on the level of control or a lack or personal service? Or are mutuality of obligation and being in business primary indicators?”

The same lack of certainty over employment status is what leads to the uncertainty of tax status for contractors under IR35 legislation.

The intentions of contractors and clients could be disregarded by HMRC

Leighton’s concern is that, through its ruling, the Supreme Court imposed its view of the workers’ employment status on the parties in contrast to that set out in the contracts and the intentions of the parties.

The implications for contractors and their clients are potentially huge. The Autoclenz case has entered HMRC’s arsenal of employment status case law. It could be applied in an IR35 review, and subsequent tax tribunal, to disregard the intentions and contracts of contractors and clients with little justification.

Leighton warns that Autoclenz has further muddied the waters in an already over complex area of the law: “Several notable Employment Tribunal decisions have been made in employment status cases not involving contractors, but which rely on the Autoclenz precedent. In each case the process by which the worker’s status has been determined has differed.”

And there is the additional concern that it is not just vulnerable, low skilled and low paid workers who have benefited from the precedent: “The recent cases relying on Autoclenz to secure employment rights include highly qualified legal and marketing consultants. That suggests the courts are not hesitating to apply Autoclenz to cases involving highly skilled knowledge workers, including contractors.”

Contractors have a role to play in educating clients about the Autoclenz threat

Despite the threat posed by the Autoclenz case, Leighton believes that both clients and contractors can implement strategies to mitigate the threat of the case being used to disregard their intentions and force an employment relationship where none exists.

Contractors have a role to play in educating their clients about why they are different from employees

Professor Patricia Leighton

“Contractors have a role to play in educating their clients about why they are different from employees,” she says. “It is also in the interests of both parties that the realities of their relationship are consistent with the contracts, because following Autoclenz, the courts are free to overturn an agreement if a document does not equate with employment realities.”

Leighton urges contractors to apply IR35 best practice, avoiding the classic pitfalls of long, ongoing contracts which do not relate to specific projects and so will attract the unwelcome attention of HMRC. And she advises clients to clearly identify and document why a contractor, rather than an employee, is required to fulfil a specific requirement.

Leighton concludes: “Ultimately, the resulting clarity can only benefit contractors: it will clearly differentiate them from a client’s employees; the contract will accurately reflect the actual working conditions; and there will be little traction for an HMRC status inspector to open an IR35 review.”

Published: 02 July 2012

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