IR35 Case 10 - Personal service companies and agencies
Key lessons from this case
- There is no single test that discriminates between contracts of service (employment) and contracts for services
- If there is a master-servant relationship and a specified individual commits to completing work it is likely to be a contract of service
- Different weights can be applied to different provisions of contracts; being "in business on his account" could be outweighed by, for example, an obvious "master-servant" relationship
- Contracts that specify exact hours and for a fixed period are more likely to be considered contracts of service than those focusing on specific project deliverables.
Summary of the case
Background
Gordon Stutchbury provided software engineering services to clients through his own company Synaptek Ltd and via a contract with agency NES. Synaptek did not contract directly with EDS, the client.
Why did the Inland Revenue act?
The IR considered that had there been a direct relationship between Mr Stutchbury and EDS, it would have been a contract of service, not a contract for services, and despite there being other concurrent clients during the period, concluded payments were Mr Stutchbury′s personal income.
Why did the contractors appeal?
Synaptek′s appeal was based on:
- There being little reasoning in the IR′s case, apart from cited cases
- The IR incorrectly used some cases to illustrate their arguments; they "misdirected themselves in law"
- There were points of law relating to the IR creating a hypothetical contract, contracts normally being concerned with points of law and the IR′s investigations dealing with fact
- Mr Stutchbury′s right of substitution and the want of mutuality of the relationship with EDS
- Concurrent clients during the work for EDS, including other clients on the same site as EDS
- Mr Stutchbury worked no specific hours (eg nine to five), came and went to suit his own schedule and assisted other companies on site during the working day
- The contract with NES, saying Synaptek was responsible for its own training, provisions of equipment, insurance and indemnifying NES
- Mr Stutchbury using his own reference books as tools of trade on site with EDS.
Who won and why?
The contractor′s grounds for appeal appeared strong and many were classic IR35 defence strategies. However, the IR won because the judge considered:
- Time was the issue in the contract, a standard 37.5 hour "working week", not specific project deliverables
- Although there was the right of substitution, the right was never sought and also required permission from the client
- When the IR created a hypothetical contract between EDS and Mr Stutchbury, this mixed fact and law and the High Court considers only points of law
- Concurrent clients were mostly evenings and weekends; Mr Stutchbury was mostly on site at EDS during the week
- That Mr Stutchbury was in business for himself was outweighed by other factors of the case
- There is now significant case law challenging whether the employer′s obligation to provide work (want of mutuality) is in all cases an essential element of a contract of service
- Mr Stutchbury was integrated with EDS employees and was sufficiently integrated to require a line manager
- Being exposed to financial risk was limited to the insolvency of NES.
Although seemingly quite comprehensive, the terms of the agreement between NES and Synaptek did allow the IR to challenge Mr Stutchbury′s status as a contractor being in business for himself, and the Judge agreed with their conclusion.
Click here for full details of the case
To speak to one of our tax experts call 0845 643 1580.