Working through an agency, and claiming it is the client, does not provide any protection from the IR tests used to assess IR35 status, and the Court of Appeal says those tests are not ambiguous
IR35 Case 9 - Working through an agency
Key lessons from this case
- If you work through an agency, but the obvious facts demonstrate you are working for a client, you can′t claim your relationship with the agency falls out of the scope of IR35 – the hypothetical employment relationship will still be with the client
- Ownership of more than 5% equity of a third party, eg your personal services company or an agency, satisfies IR35 conditions
- There is no ambiguity in the law; the court of appeal considered the tests used to determine whether IR35 applies are sound
- The level of control available to the client over the contractor is considered to be a key element of the IR′s tests for IR35; a high level of integration and line management of the contractor into the client suggests a direct employment relationship and IR35 provisions apply.
Summary of the case
Background
Shane Roberts provided computer system testing services through his company Future On-line Ltd. He was contracted by agency Elan Computing Ltd to provide services to Electronic Data Systems Ltd (EDS) over three years on two sites. EDS provided "purchase orders" to Elan to supply IT contractor services. Future On-line had a contract directly with Elan, but there was no formal relationship between Future On-line and Mr Roberts and EDS.
Why did the Inland Revenue act?
The IR considered that, had Mr Roberts not worked through intermediaries Future On-line and Elan, in providing services to EDS he would have been directly employed with a contract of service. Earnings from EDS should therefore be considered direct earnings by Mr Roberts and should attract tax and National Insurance liabilities.
Why did the contractors appeal?
The grounds for appeal in this case did not rely on some of the more common approaches involving right of substitution or mutuality of needs. The grounds for appeal were:
- EDS was not the client, in fact Elan was the client and the tests used by the IR to identify IR35 cases were not met by Mr Roberts′ relationship with Elan
- If Elan was in fact the client, there is ambiguity in the law and Parliamentary proceedings require analysis to determine the true intent of the law
- The IR Special Commissioner "misdirected himself" regarding the law for the tests and condition used to determine whether IR35 should apply
- The IR unfairly considered Mr Roberts as part of EDS and therefore notionally employed, and not part of the project team as an independent contractor.
Who won and why?
The Judge was not satisfied with the grounds for appeal and the IR won; the appeal was rejected. The Judge′s reasons were:
- Mr Roberts provided IT services and skills. The main business of Elan was recruitment consultancy and the main business of EDS required IT skills. EDS was quite obviously the client
- The Judge accepted in court that Elan could be a client and would have accepted that Elan would not satisfy the IR′s IR35 tests, but still maintained that EDS was the client
- The argument for ambiguity in the law and the tests used by the IR to demonstrate IR35 provisions was rejected, because the Judge did not consider any ambiguity to exist
- Given the detail of the IR′s report and investigation of Mr Roberts, the Judge was satisfied the IR Special Commissioner had not misdirected himself
- The IR report indicated Mr Roberts was obviously well integrated into EDS, accountable to an EDS manager and managing his own team.
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