Employment Status and IR35 Legislation - Commissioners uphold HMRC decision

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In a significant decision for workers affected by the "IR35" legislation, the Special Commissioners have rejected an appeal from the director of a personal service company against HMRC assessments for PAYE tax and NICs. The decision, in the case Island Consultants Ltd v HM Revenue & Customs was given on 5 July 2007.

The IR35 legislation applies where a company enters into a contract with a service company for the supply of personal services. In this case, Mr. Hough, director and shareholder of Island Consultants Ltd, worked for Severn Trent Water Ltd under a contract between the two companies. He worked as an IT specialist on a five-year data conversion project. In these circumstances, the IR35 rules (Income Tax (Earnings and Pensions) Act 2003, sections 48 to 61) require the worker to hypothetically decide whether, if the contract had instead been between Severn Trent and Mr. Hough personally, Severn Trent would have had to treat Mr. Hough as an employee, deducting PAYE tax and Class 1 NICs. If so, the legislation requires Mr. Hough to pay, in effect, the same amount of PAYE tax and NICs through his limited company.

Island Consultants, Mr. Hough's own limited company, appealed against HMRC's assessments to the Special Commissioners. The Commissioners applied the "picture painting" approach from the Hall v Lorimer decision, namely to stand back and look at the whole picture, not at the fine detail. This is now the standard approach to these employment status questions. The key factors considered by the Commissioners were:

• In business on his own account - Mr. Hough did not work for other clients or offer his services elsewhere and could not increase his remuneration above the daily rate. He had virtually no overheads and there was no possibility of making a loss.
  
  
• Payment terms - Payment within the following month after submitting time sheets within 10 days of the end of the month involves a longer period of risk than for normal employees.
  
  
• Financial risk - Although defective work had to be put right in his own time, payment was calculated on days of varying length and any corrections were made within that flexibility.
  
  
• Provision of equipment - The provision of equipment was not relevant as Mr. Hough had to work on Severn Trent's mainframe computer.
  
  
• Length and number of engagements, and exclusivity - The five-year project consisted of a number of short-term contracts and there was an expectation but no guarantee that each contract would be renewed. He did not work for anyone else during the project period.
  
  
• Provision of benefits - He did not receive any of the fringe benefits provided for Severn Trent's employees.
  
  
• Rights of termination - Four week's notice was required for termination of the contract.
  
  
• Intention of the parties - This factor was not relevant as they could not have any intention over a hypothetical contract.
  
  
• Part and parcel of the organisation - Mr. Hough was provided with a desk and computer terminal, a car park place and access to canteen facilities. His badge identified him as a contractor. He worked on a particular project, not as part of Severn Trent's business. He was not in charge of other staff.

The Commissioner's view, having considered the position as a whole, was that the factors predominantly point towards employment. The only factors pointing away from employment are the longer payment terms than normal for an employee, which is not important; and the intention of the parties, which cannot be directed to the hypothetical situation. Although the number of separate contracts would normally point away from employment, and there was a risk of the contracts not being renewed, there was no real commercial risk as the project needed his services and he was satisfactorily performing his duties.

The decision, therefore, was that Mr. Hough would have been an employee under the hypothetical contract and the appeal was dismissed.

...UK Payroll News - Latest

Source:
Island Consultants Ltd v Revenue & Customs

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