Employment Status - Special Commissioner rejects HMRC's status assessment

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17 January 2008

The Income Tax (Earnings and Pensions) Act 2003 defines special rules ("IR35" rules) that apply when a worker provides services to a client under a contract between an intermediary and the client in circumstances where, if the contract had been between the worker and the client, the client would have had to treat the worker as an employee for tax purposes.

A recent decision of the Special Commissioners, Datagate Services Ltd v HM Revenue & Customs, illustrates this situation. Datagate is a limited company providing computer consultancy services. Mr. Barnett is the sole director and shareholder of Datagate. In January 2001, Datagate entered into a contract with a project company under which Datagate would supply the services of Mr. Barnett to a MBDA, a developer of missile systems. The contract continued until September 2004.

Although Mr. Barnett was not an employee in fact, HMRC subsequently decided that the hypothetical "IR35" rules applied to this contract on the basis that the working relationship between Mr. Barnett and MBDA was such that, if the contract had been directly between them, it would have been a contract of employment and MBDA would have been obliged pay him through the payroll, deducting tax and NICs. HMRC assessed Datagate as owing £28,774 in tax and £17,482 in Class 1 NICs in respect of the three tax years in question. Datagate appealed against the assessment and, in a decision given on 20 December 2007, the Special Commissioners allowed the appeal.

Employment status, i.e. whether or not a person is an employee for tax and employment law purposes, is decided on an overall view of a number of work-related factors. The process is known as "picture-painting" because a status decision has to be made by "standing back and looking at the picture as a whole", without giving undue weight to particular factors.

HMRC argued that, if the contract had been made directly with Mr. Barnett, it would have been a contract of employment because, among other factors:

• MBDA had a right of control over Mr. Barnett's work
  
  
• his obligations were those of an employee
  
  
• he was treated, and worked, in the same way as an employee
  
  
• the time he worked and the work he performed was agreed with MBDA
  
  
• he undertook a business trip at MBDA's request
  
  
• he wore a work badge
  
  
• the pay rates were employee pay rates
  
  
• he was subject to a disciplinary procedure which was the same as for employees
  
  
• he was integrated into MBDA's because he worked in a team with employees.

On the basis of the guidance listed in HMRC's own Employment Status Manual, the Special Commissioners found that

• there was no ultimate right of control on the part of MBDA, other than as required by the security requirements imposed by the nature of the business
  
  
• the contract documents do not require personal service and a substitute could be provided
  
  
• the provision of equipment and materials by MBDA was not significant given the security context
  
  
• there was risk of financial loss because MBDA were at liberty to end the contract
  
  
• Mr. Barnett was free to organize his work to give him more free time
  
  
• there were no employment-type benefits such as sick pay or pensions
  
  
• Mr. Barnett was not required to work exclusively for MBDA
  
  
• he was not "integrated" into the business as an employee as his projects were mainly self-contained

Accordingly, the appeal was allowed, with the effect that tax and NICs were not due on the payments under the contract as if they were employment income.

Although this case was considered in the context of the "IR35" rules, the same employment status factors should be used to decide whether an individual engaged on a "self-employed" basis should instead be treated as an employee and paid through the payroll. HMRC's Employment Status Manual provides useful guidance.

...UK Payroll News - Latest

Source:
Datagate Services Ltd v HM Revenue & Customs
Computer staff supplied by agencies
Service companies and other intermediaries
Basic guide to employment status: relevant factors

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