Contractors need to pay close attention to their working practices to avoid IR35 risk - after another contract was overridden in a significant employment status tribunal.
In the case of Dewhurst vs CitySprint Ltd, Judge Joanna Wade ruled that despite a contract suggesting otherwise, bicycle courier Maggie Dewhurst was a worker and not a self-employed contractor. This judgment uses the same employment laws that underpin IR35, so very important lessons can be learnt.
This is a stern reminder that if you fail to match your contract with your working practices then you are at serious risk of being caught by IR35, resulting in you paying thousands of pounds more in tax.
The contract did not reflect reality
Judge Wade determined that the working relationship did not reflect the contract, and that far more control was exerted over Dewhurst than the contract implied.
The Judge concluded that : “[they] have little autonomy to determine the manner in which their services are performed and no chance at all to dictate their terms.”
Whilst CitySprint was careful to ensure that its contract demonstrated that control, personal service and mutuality of obligation were not present, this alone was not enough, which makes this lesson all the more important. Staying outside IR35 is not simply a paper exercise.
Martyn Valentine, director of The Law Place, said "This case shows once again that in order to operate outside of the IR35 legislation a contract for a particular engagement must accurately reflect the working practices and a 'one size fits all' approach adopted by many agencies is no longer workable."
Contractors, always consider the notional contract
Referring back to the landmark Autoclenz Supreme Court judgement, Judge Wade stressed the importance that the notional contract – an assessment of the actual working relationship gathered from various pieces of evidence - is considered, with consideration given to the relative bargaining power of either party.
Dewhurst pointed out that couriers were obliged to effectively waive their rights by completing the confirmation of tender before they were allowed to start work. This was a prime example of what Judge Wade referred to as an “inequality of bargaining power” that CitySprint sought to exploit.
The lesson for contractors is that if you simply sign any contract put in front of you, a judge could rule that the terms were effectively forced upon you, and not really the ones in force, and that therefore the contract is a sham. Negotiating positive changes to a contract is always a wise strategy.
How was control exerted over the worker?
Dewhurst’s working arrangement revealed a high level of control exerted by CitySprint. The tribunal heard how the operations training that each new courier undergoes involves a trainer instructing them on ways to properly greet a customer and what to do if nobody is home.
Whilst Dewhurst may have had discretion over aspects such as the route taken to deliver an item, she didn’t have discretion to determine how the services were performed. And invoices were arranged by CitySprint, to determines fees paid which Judge Wade said were “a payslip in all but name”.
ContractorCalculator CEO Dave Chaplin warns. “Contractors need to be very careful to ensure that what they work on, and when and where they carry out this work, isn’t subject to too much control. Otherwise they could land themselves a hefty tax bill.”
Judge slams “contorted” substitution clause
The CitySprint contract stipulated that a courier could provide a substitute, but serious questions were raised, and the tribunal determined that in reality Dewhurst did not have the right since only current CitySprint couriers would in practice qualify to be a substitute.
Describing the substitution clause as “contorted” and “self-destructive”, Judge Wade argued that personal service was required of Dewhurst, concluding:
“Ms Dewhurst is in a simple binary relationship with the respondent; one courier working personally for one organisation at any one time and any concept of her operating a business is a sham.”
Dewhurst vs CitySprint – key lessons for contractors
The claimant was coerced into signing a dishonest contract. The Judge attributed this to an inequality of bargaining power, and the claimant demonstrated that her reliance upon the income earned from CitySprint led her to feel obliged to comply with its requests.
For Chaplin, contractors need to remain vigilant when negotiating contracts with clients:
“Contractors need to be careful to ensure they don’t just sign anything. Contracts need to be reviewed for IR35, checked by a specialist lawyer and negotiated to reduce any potential risks. If a contractor just blindly accepts what is put in front of them, it is much easier for a Judge to put it aside.”
But you must ensure that your working arrangement is consistent with the written contract. This is now particularly important in the public sector where the reforms mean HMRC inspectors will be especially active. The only way to minimise your risk of being caught by IR35 and save thousands in tax is to carry out your due diligence.