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IR35 Judgement Comes to Light 18 Months Later

IR35 gem is uncovered as judgement comes to light one and a half years' later

Where the Tax Tribunal gives a decision orally at a hearing it must nevertheless provide the parties with a written decision notice. Once this has been done, then an application can be made for full written findings and reasons within 28 days which can then be published for public viewing. Despite securing an IR35 victory back in November 2016, David Armitage declined to do so, but both he and his representative have now broken their silence.

Mr Armitage is a very skilled Electrical Control and Instrumentation Designer with over 25 years’ experience in the nuclear industry. During the periods 25th October 2010 – 11th March 2011 and 23rd July 2012 – 25th January 2013, his PSC, Armitage Technical Design Services Ltd (ATDSL), provided design drawings for Beamlines on individual projects to Diamond Light Source Ltd (DLS), via two different agency contracts. For the years 2009/10, 2010/11, 2012/13 and 2013/14, HMRC issued tax and NIC assessments totalling over £68,100 together with penalty assessments of just over £13,300.

Whilst Mr Armitage firmly believed his company’s contracts were not caught by IR35, he made an offer to settle the tax and NIC for the two years that were in date with no penalty, simply because he wanted to bring an end to the matter. HMRC however were not interested as they wanted a penalty for ‘careless’ behaviour, arguing that Armitage had not sufficiently considered IR35 before submitting the company’s P35s.

 

Personal service (including right of substitution)

Both contracts contained substitution clauses and Armitage understood these to be genuine, which was confirmed by the HR department of DLS. In contrast, HMRC put forward evidence that James Kay, the Senior Engineer for DLS, indicated that if Armitage was not available then he would ask the employment agency to provide a replacement worker rather than allowing ATDSL to send a substitute. Whilst this is what might have happened in practice it was never tested.

From his extensive work in the nuclear industry, Mr Armitage had established a number of contacts which he could have called upon to substitute for him, if required.

The Tribunal accepted that a contractual right of substitution existed albeit it was limited and subject to DLS’s approval.

Whilst there was a suggestion that the contractor’s personal service was a requirement, the Tribunal was not absolutely satisfied this was so.

 

Mutuality of obligation (MOO)

The Tribunal dismissed HMRC’s mantra that an offer and acceptance of work amounts to MOO in the context of employment status and considered this factor to be neutral. By inference therefore, for MOO to be more decisive, the argument must go beyond HMRC’s very simplistic definition.

 

Right of control

Where

DLS headquarters is based in Didcot and they wanted Armitage to be based there as this was where Beamline science actually took place. The contractor however declined and set himself up in another group location in Warrington because this was more convenient for him and his family. No one else from DLS worked there as they had since been relocated to Didcot. It was however necessary for the work to be carried out at the Warrington site because that was where the computer connected to the mainframe was situated.

Visits to DLS HQ were only made by Armitage to discuss new project work twice a year.

How & what

Whilst regular staff meetings took place at DLS HQ, Armitage was never invited to attend these.

There was no-one at the Warrington site to physically supervise Armitage. Kay of DLS told HMRC that all work was supervised and reviewed by a DLS employee in Didcot but this turned out to be only for approval purposes.

The drawings that the contractor produced fitted within the overall project and the DLS senior project engineer approved them and ensured they were in accordance with the job specification. 

Despite Kay stating that a staff senior engineer kept in regular contact with the contractor either by e-mail or telephone, the reality was that this was infrequent, as a week could easily pass without any such contact.

Kay also said that there was no difference between Mr Armitage and DLS employees in how the work was allocated, executed or reviewed.

ATDSL only provided those services specified by the contract, nothing more and nothing less.

Whilst there was a reasonable degree of control over how the contractor worked, it was not sufficient enough to make DLS the master and the Tribunal considered that on this aspect, the only form of real control exercised over the work was for overseeing the project and checking on progress.

When

Although Armitage was required to work a fixed number of hours per week between 9am and 5pm, he worked his own hours and for 95% of his working time he finished at lunchtime on Fridays unlike the DLS employees who had to work core hours until 3 pm.

Whilst there was a requirement to complete time sheets which had to be approved by the senior DLS engineer, Armitage was not subject to the same level of time control as DLS employees.

Employees were clocked in and out by an electronic time management system whereas Armitage simply kept a note of the hours he worked.

On balance, the Tribunal found that Mr Armitage was inevitably subject to less control than DLS employees. Whilst there was a reasonable degree of control over how, when and where he worked it was not necessarily consistent with a contract of employment.

 

Business on own account

In 2012, ATDSL decided to diversify its business by setting up a satellite installation business which resulted in an additional revenue stream. In the subsequent two tax years, the following invoices were issued:

Year                      DSL                    Other customers

2012/13               32                       14

2013/14               46                       27

 

In 2014, whilst still providing services to DLS, Armitage attended a Satellite Exhibition in Cologne and, although post-DLS contract, later attended trade fairs in Amsterdam and a meeting with franchisees.

The Tribunal concluded that these actions were consistent with someone genuinely in business and not with someone effectively acting as an employee.

 

Integration

Mr Armitage never attended any functions that were open to and considered a requirement for DLS employees, whatever their nature. Nor was he invited to internal training courses.

Organograms for the Electrical Engineering team and DLS Technical Division and Engineering team failed to mention Armitage as did the DLS team sheets.

Kay said that the contractor worked alongside the rest of the team in a virtual working environment (wait for HMRC future arguments to use this line) but the Tribunal dismissed this.

 

Verdict

Whilst the overall picture was very much a mixed one, there were more factors that pointed towards self-employment and the appeal was allowed, including the appeal against the penalties.

A big well done to David Armitage and his representative, John Hill of John Hill & Associates.

The judge dispelled HMRC’s rigid and incorrect approaches to the trinity of status factors, namely:

  • A fettered right of substitution = not a factor;

  • MOO = simply an offer and acceptance of work; and

  • Right of control = simply a hint or whiff of any control is sufficient to prove it exists over the worker.

Despite recent IR35 judgments following a similar course, HMRC are either deliberately ignoring Tribunals’ approaches and thinking, or lack the common sense to take it on board (or both).

When will the penny drop, or will their unequivocal bias continue at the cost of taxpayer money?

The summary judgment that was issued in January 2017 can be found here.

By:Andy Vessey - Head of Tax

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