IR35 Case 4 - Personal services companies
Key lessons from this case
- Tax and National Insurance legislation can assume a hypothetical contract of employment where the individual is obliged personally to perform services
- Traditional IR35 defences, like "substitution" and "want of mutuality", can be overridden by other factors
- Contractors should have a proper "paper trail" to establish, for example, that provisions for substitution are carried through to all contracts
- IR Special Commissioners consider all facts; the High Court only considers points of law.
Summary of the case
Background
William Hood provided design-drawing services using Pro-Engineer software. He was recruited, through his company Usetech Ltd, by agency NES to provide his services for 17 months to client ABB. Usetech had a contract with NES, NES had a contract with ABB, but there was no contract between Mr Hood/Usetech and ABB.
Why did the Inland Revenue act?
The IR thought the relationship between Mr Hood and ABB was a contract of employment, despite intermediaries NES and Usetech. Usetech therefore had tax and National Insurance liabilities. So IR35 legislation would consider payments to Usetech by ABB as the personal income of Mr Hood from direct employment by ABB.
Why did the contractors appeal?
Usetech appealed to the High Court on two points of law:
- Usetech had the "right of substitution", allowing Mr Hood to provide replacements if he was unavailable
- There was a "want of mutuality"; the client ABB was not obliged to provide work and the service supplier, Usetech, was not obliged to provide service.
These points are normally thought to be inconsistent with a contract of employment.
Who won and why?
The IR won because the Judge considered the two points of law were not valid in this case.
"Right of substitution" was rejected because the judge considered:
- Tax and National Insurance legislation created a hypothetical employment contract between Mr Hood and ABB
- This hypothetical contract would not have included a clause related to "right of substitution"
- There was no substitution clause between NES and ABB (although there was between Usetech and NES).
Previous cases support this where:
- It is obvious that a specific person would be fulfilling the work
- Limited or occasional power of delegation can be in a contract of employment
- Other factors must be considered; a substitution clause may be acceptable in an employment contract if there are other strong indicators that the relationship is a contract of employment.
"Want of mutuality" was rejected because the contract between NES and ABB had minimum obligations for ABB to provide work for Mr Hood. The reasons were:
- The relationship lasted 17 months, averaging 58 hours per week
- ABB witnesses agreed Mr Hood could have been sent home without pay but could not remember occasions when he was
- When Mr Hood was sent home without pay it was mostly for additional weekend work being cancelled
- Mr Hood could not know he was not going to be paid as he did not know the details of NES′s and ABB′s contract
- There was a minimum-hours clause in the contract between NES and ABB – 37.5 hours per week including unworked time.
The Judge concluded that had there been a hypothetical contract of employment between Mr Hood and ABB (as required by tax and National Insurance law) then there would have been an obligation by ABB to provide work, so the argument failed.
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