HMRC lose ir35 case

[Denny]

Datagate Services v HMRC: New Year brings victory for common sense.

Read all about it on ITContractor site. A good ir35 victory for the contractor. Can't paste the link, unfortunately.

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Another win as well, lifted from the PCG website.

First Word Software v HMRC heard by Dr Brice. Matt Boddington of Accountax said that "this was a clear and unequivocal judgment in favour of the freelancer. The decision shows how IR35 appeals can be won when addressing the fundamentals of personal service, control, MOO and business factors. HMRC used the same tried and failed arguments and will no doubt see this case as a major setback".

[beaker]

From Lawspeed...

New Year brings victory for common sense

The Special Commissioners have reached their decision in the case of Datagate Services Limited v The Commissioners for Her Majesty’s Revenue & Customs and have decided in the contractor’s favour. This is a significant result to welcome in the New Year and is likely to attract considerable attention. This is only the fourth ever IR35 victory for a contractor at this level and follows what was a worrying trend of four successive losses, most recently the Island Consultants case which was lost at the end of last year.

During the course of the two day hearing the Special Commissioner, Mr Adrian Shipwright, heard evidence from the contractor Mr Bret Barnett of Datagate Services Limited, Mr Simon Wycherley of MBDA (the end-client) and Ms Nicole Hartland, also of MBDA and made the following findings of fact:

Datagate entered into a contract with the agency (latterly Technology Project Services International Limited (TPS)) for the supply of services to MBDA.

The contract excluded an employment relationship, and the contract contained features that you would not find in an employment context.

The Special Commissioner set out clauses in the contract of material importance relating to intention and, most importantly, Datagate’s right to provide services to other parties during the currency of the engagement.

Datagate was paid by the hour plus VAT.

TPS had an arrangement with MBDA for the supply of services.

As in the case of Ansell Computer Services v. David Richardson (HMIT) (SpC 425) (2004) the work had to be carried out by a particular person primarily for security reasons.

There was a right to substitute subject to security clearance. This right was not exercised.

There was no provision for a minimum number of hours.

Mr Barnett had discretion as to when to work and discussed time off with the team leader as a matter of courtesy.

Mr Barnett worked with the relevant team but was provided with ‘discrete sections of work’, namely projects.

MBDA wished to learn from him

The Special Commissioner then reached the conclusion that Mr Barnett’s relationship with MBDA ‘was that of a professional consultant providing independent services when looked at as a whole’.

In making these findings of fact, the Special Commissioner focused primarily on Ansell and the overall test of whether Mr Barnett was in business on his own account within the context of the engagements with MBDA and the other circumstances. The Special Commissioner also referred directly to the well known factors set out in the Revenue’s Employment Status Manual.

The Special Commissioner placed considerable importance on whether there was an ultimate right of control by MBDA over Mr Barnett. However, as in the case of Ansell, the Special Commissioner took account of the strong security requirement as the projects concerned were defence-related and concluded that any right of control was not akin to that expected of employment. Similarly, the Special Commissioner dismissed HMRC’s argument that the provision of equipment by MBDA was indicative of employment within the security context. At the hearing the Special Commissioner commented on the strong similarities with Ansell.

During the hearing Mr Michael Faulkner for HMRC argued that a right of control existed over Mr Barnett as to the hours to be worked and that the work itself had to be ‘agreed’ with MBDA. This line of argument is clearly illogical and the Special Commissioner did not regard this as an important factor in the outcome of the case.

The Special Commissioner provided useful comments on the issue of financial risk. During the hearing Mr Michael Faulkner for HMRC argued that Datagate was not exposed to significant financial risk. The Special Commissioner concluded that this argument is ‘somewhat circular’ and the fact that Datagate would lose its main source of income if the contract was terminated demonstrated greater financial risk than would be expected in a relationship of employment.

Equally, the Special Commissioner found that Mr Barnett could profit by sound management by organising his work effectively. The Special Commissioner placed an interesting interpretation on this test by accepting that Mr Barnett was able to organise his work to give himself the benefit of more free time rather than simply provide services to other clients concurrently and thereby profit financially. Mr Barnett gave compelling supportive evidence that MBDA did not have a right of control as to when the work was done.

Although the decision does not specifically address the fundamental issue of mutuality of obligations, the Special Commissioner found that Datagate was only entitled to payment for work done and the work was project based (in a similar manner to Ansell) and so not integrated into the end-client’s business. This emphasises the importance of defining the work as a discrete project at the outset and follows Lime-IT and Ansell, the importance of which has consistently been highlighted by Lawspeed from the inception of IR35. It is important to note that the contract with the agency TPS defines the work to be completed and, unlike Synaptek, did not place an obligation on TPS or MBDA to provide work to Datagate and Mr Barnett during the currency of the agreement or after completion of the services.

The Special Commissioner also considered that there was no requirement for personal service in the contractual documents and that Datagate had a right to substitute and engage helpers. As the conclusion was reached with the benefit of evidence from both the end-client and Mr Barnett (unlike Lime-IT), the decision does not provide further guidance on the issue of whether a substitution clause in a contractual chain involving an agency is enforceable in respect of the end-client.

In addition, the Special Commissioner did not accept HMRC’s argument that the existence of a right to terminate a contract is equivalent to a right to give notice under a contract of employment. This argument is in any event illusory as TPS and MBDA were only obliged to pay Datagate for work done.

Interestingly, the intention of the parties was also considered as a relevant factor despite the requirement in the IR35 legislation to assess the hypothetical contract between the worker and the end-client. Even in respect of regular employment status arguments, case law on this subject has indicated that the intention of the parties would normally only be relevant in borderline cases, so it is somewhat surprising for intention to be considered in this case.

Mr Michael Faulkner for HMRC sought to rely on generic information regarding working arrangements supplied by the end-client, as is consistent with present policy. At the hearing it became clear to all present that the evidence of Ms Nicole Hartland on behalf of MBDA was based on a document concerning employment at MBDA and did not inform of Mr Barnett’s specific working arrangements as a contractor. Therefore this was irrelevant and the Special Commissioner made his views clear on this subject in the decision. This is welcome and it is hoped HMRC Status Inspectors will now rethink this approach and concentrate on seeking evidence from end-client representatives who are fully aware of the contractor’s specific working arrangements.

As with Lime-IT the presence of an agency in the contractual chain did not affect the assumption that MBDA was the end-client for the purpose of the hypothetical contract.

It is also interesting to note that the hearing was attended by several other HMRC Status Inspectors, presumably as a training exercise.

Martyn Valentine, who handled the case with James May at Lawspeed said, “in conclusion, this decision has many interesting aspects, particularly the Special Commissioner’s application of Ansell. Following the disappointing result in Island Consultants, this decision will provide welcome reassurance to contractors that it is possible to operate outside the IR35 legislation and overturn status decisions by HMRC. This illustrates yet again the importance of ensuring that the true working arrangements are reflected in the contractual documents and that the work is set out as a discrete project to minimise the key factors of control and mutuality of obligations, and to distinguish the contractor’s work from the end-client’s business.”

Mr Barnett of Datagate said, “my case began over 4 years ago as an employer compliance review which escalated to an IR35 status investigation. Initially I handled the enquiry myself, but when complexity of employment law became apparent I sought professional help. James May and Martyn Valentine at Lawspeed dealt with the Revenue on my behalf, and instructed John Antell who presented my appeal at the Special Commissioners. The appeal was attended by representatives of the end client as well as Lawspeed. The fact that IR35 has eventually been found not to apply is a great weight off my mind and will hopefully give others confidence that it is possible to remain outside IR35 as long as working practices are sound and well documented. I believe that the help and advice I received played a large part in my eventual success, and due to the vague and poorly defined nature of the IR35 legislation, I'd recommend anyone similarly affected to seek advice from Lawspeed as early as possible.”

This article was prepared by Martyn Valentine LLB (Hons) Legal Consultant at Lawspeed Limited, experts in IR35, contract, recruitment and employment law. For advice on all aspects of contracts including commercial terms and IR35 status call 01273 236236 or visit www.lawspeed.com for further details.

[Bumfluff]

Fooking hell 4yrs it took to do the investigation, you got to have balls to see it through if you dont have insurance, interest payments would of been massive if lost.

[Archangel]

Fooking hell 4yrs it took to do the investigation, you got to have balls to see it through if you dont have insurance, interest payments would of been massive if lost.

and the client had to get involved, not something we would want to advertise.

[malvolio]

and the client had to get involved, not something we would want to advertise.

Why not? Plus the important point was that they took advice on the relationship from someone who knew the reality, not from some corporate Human Remains nobody.

[VectraMan]

At the hearing it became clear to all present that the evidence of Ms Nicole Hartland on behalf of MBDA was based on a document concerning employment at MBDA and did not inform of Mr Barnett’s specific working arrangements as a contractor.

Sounds like an HR numptie to me.

Are the client obliged to send somebody if requested, or can they just refuse to have anything to do with it? I know my client has a policy of not giving references to permies (presumably contactors too), I can't imagine they'd be very happy about helping to defend a contractor from 4 years previous.

[SueEllen]

Sounds like an HR numptie to me.

Are the client obliged to send somebody if requested, or can they just refuse to have anything to do with it? I know my client has a policy of not giving references to permies (presumably contactors too), I can't imagine they'd be very happy about helping to defend a contractor from 4 years previous.

But if the contractor lost and the client hadn't changed their contracts they could potentially be opening the way up for other contractors to sue them for employment rights.

[oracleslave]

It's not all good news.

http://www.contractoruk.com/news/003617.html

[malvolio]

It's not all good news.

http://www.contractoruk.com/news/003617.html

Hmmm... Self-inflicted injury, clearly. If you want to be treated as a business, first you should act as one. An expensive way to learn that particular lesson.

[VectraMan]

Secondly while he “did not get instructions” on how to perform, his tasks were always allocated, his work on an international project was “monitored” and he worked among a team.

Special Commissioner Charles Hellier added: “He reported his progress to Mr Jarrett or other project managers and discussed what he was doing with other members of the team.

“Although these interchanges did not consist of giving orders it was clear to me that they would have affected what he did, when he did it, and how he did it.”

That's a bit of a worry. Are we supposed to completely ignore project managers (that'd be good), ignore client's requirements and keep them in the dark as to progress?