IR35's first ever "split case"
The first ever split-case IR35 challenge concerns a contractor whose status shifted from that of contractor to employee while working for the same client for a period of seven years. The case shows how important it is to ensure contractors undertake specific jobs, review and renew their contracts, and avoid taking on jobs "as they come up" within the same company while working on specific projects. For more information about IR35, including our article "Seven Ways to Avoid the IR35 Trap" visit the DNS website Knowledgebase /Tax Tips and Articles.
The case concerns a now-retired IT contractor, Mr Spencer, who traded as JLJ Services Ltd for 17 years, seven of which were spent working as a contractor for a client Allianz, during which time a Bristol Tax Tribunal found, he fell both outside and inside IR35 at a single job.
For the first three years of a seven-year period, it was decided that Mr Spencer was definitely a contractor with Allianz, but then, for a period of about four years, the job changed from a contractual one to employment, and he fell into the role of "disguised employee". The judge expressed that in his opinion "Up to a point you were doing specific bits of work and projects, after that point you were really no different to being a permanent employee."
The judge said that the "precise point" at which the change in his employment status occurred was not "easy to define" and stated that "at the end of December 2003 there were various indications that the relationship did then change", concluding "Our decision is accordingly that in the early period, prior to the end of 2003, Mr Spencer would not have been regarded as an employee, but that from the start of 2004 on wards, he would have been regarded as an employee."
The case highlights the need to consider IR35 when extending or renewing contracts. A contractor may fall outside IR35 initially, but subsequent changes to the working reality can mean the contractor falls inside IR35 for a particular contract. "The strongest argument against IR35 is control" one commentator asserts. "This is simply because that's where you can really show that you are an independent [business] … Indeed, the argument for the earlier part of the contract was that it was for labour on discreet pieces of work; where [Mr Spencer] had more control."
Even though Mr Spencer did not "clock in" like other employees, if some emergency arose, he would stop work on a particular project and attend to the other matter first. This was "understandable" the judge agreed, but the fact that nobody else in the client's company had the detailed knowledge of Mr Spencer's field of expertise to judge whether in every respect he was tackling his projects in the best way, was seen as difficult because:
"Such a lack of control is 'fine' when the worker is providing expert services … but for a contractor, the central message being sent by the courts is that if you're going to engage over a long period, then you really need to be able to show that you're engaged on specific projects … To be outside IR35 you can't just basically get on with whatever work crops up. Do that and you risk ending up becoming very much part and parcel of their organisation. So if you're not doing separately identifiable and discreet projects, then it's very easy over an extensive period to be perceived as part of the client's furniture. That's what happened here and to my mind, that's Mutuality of Obligation."
Mr Spencer had become a key computer expert within Allianz and there was little to support the claim that the company could substitute him or that Mr Spencer could send a substitute if necessary to carry out the work. It was judged that the work Mr Spencer was required to do in this capacity was likely to be available indefinitely, and certainly ceased to be engaged just for identified projects, thus failing the test of "undertaking ‘one’s own business’".
Even though Mr Spencer did not enjoy a pension plan, holiday pay or sick-leave rights; did not enjoy the benefit of a company car or get reimbursed for his business travel costs, and even had to pay for his own Christmas lunch, he had nonetheless become indispensable, if you like, called upon to do jobs as they cropped up in the area of his expertise?IT?and unwittingly maybe had become a "part of the furniture".
Take care of this with long-standing clients: always make sure that you are working on a specific contracted job; if other jobs crop up, even an emergency, take the job on, send a substitute, make sure there is no mutuality of obligation where you as an individual are concerned, and that you have control over the jobs you carry out and when.
So, be warned, be very careful about how you are operating.
@Take on specific projects and do not take on other jobs as they come up within the company. If something comes outside the requirements of your contract try to use a substitute. This will ensure you maintain the identity of your business.
@Do not become an indispensable part of the organization.
@For some Jobs in IT support you may end up supporting every kind of IT problem. This can become very dangerous in long-term when renewing your contract, so be very careful; have your contract checked by an expert.
@Make sure that there is no mutuality of obligation and no implication that there is assurance that the work will flow endlessly.