IR35 case law

IR35 case law

Regardless of what is published by HMRC in its ‘guidance notes’ that reflect only HMRC’s own view of the law, it is ultimately the court that determines whether or not IR35 applies in any disputed status case. There is no perfect template case that can be used as a benchmark for your situation, but various cases over the years have shed light on aspects of IR35 status. By far the most important case is the Ready Mixed Concrete case of 1968 which set out the principles of control, personal service and mutuality of obligation. Every IR35 defence will start with these principles.

Please keep a check on our blog that updates with latest news on IR35 cases. Meanwhile, our colleague, Paul Mason from Abbey Tax, has published this update in 2012.

An Update on recent IR35 Case Law

There have been concerns that HMRC has updated the employment status manuals on its website to reflect recent ‘IR35 victories’ - namely Dragonfly Consultancy Ltd and Larkstar Data Ltd.

This appears to indicate that somehow the status arguments are flowing HMRC's way. Even allowing that HMRC only tends to publish cases that support its views, let us consider what has changed in recent status cases. There has been rumour that the right to substitute as an argument to deny personal service is dead.

Substitution

In Dragonfly, it became evident that there was neither a substitution clause in the upper contract between the agency and the AA, nor could a substitute be sent without the AA’s consent.

In Autoclenz & Belcher & Ors, it was rightly argued that if the working arrangements indicated that substitution was not a reality, then a substitution clause could not be relied upon, but crucially it was also contended that because substitution had not taken place it did not mean that the right to substitute was meaningless.

Control

So, if an unfettered right to substitute is still relevant, what about the issue of control? In Larkstar, it was noted that Mr Brill had to work the core hours of the end client, and in Autoclenz it was determined that to satisfy its customers’ requirements Autoclenz had to control how its valeters did their work.

Furthermore, in Dragonfly, the regular appraisals of Mr Bessell’s performance were indicative of control. On the other hand, recent tribunals have also reaffirmed Ready Mixed Concrete, while significantly clarifying control in the context of current working conditions (Health & Safety rules, etc.) such that ‘how’ the work is performed is considered as the key factor.

Mutuality of Obligations

One area that has taken a battering recently is mutuality of obligations. In Larkstar and in Dragonfly, the obligation to finish an assignment – mutuality within – was found to be present even if ongoing mutuality (the offer and acceptance of future work) was denied. Despite Accountax’s success in arguing for the taxpayer in Castle Construction Ltd v HMRC [2008], Littlewood & Ors v HMRC [2009], and Sherburn Aero Club Limited v HMRC [2009] all seemed to undermine mutuality as one of the key status tests. Yet, in none of these cases was mutuality denied through a properly worded clause, such as those one often sees as a feature of a well-written contract for services. Therefore we should not argue that mutuality has had its day.

Business factors

The last three cases also demonstrate that HMRC has not had it all its own way. ‘In business’ factors such as equipment and business set-up costs are becoming increasingly important and tribunals are also leaning towards the Ready Mixed Concrete emphasis of establishing what factors are inconsistent with an employment relationship, rather than HMRC’s approach of looking at what factors demonstrate being in business on your own account. The approach may not seem too different, but it is a much stricter test imposing a positive burden to demonstrate being in business than demonstrating inconsistencies with employment.

So, despite HMRC successes in Dragonfly, Larkstar and Autoclenz, we believe that the case law tests have not changed. These are all very individual cases. Yes, the emphasis may have shifted, but the fundamental tests remain the same as 40 years ago in Ready Mixed Concrete. What we can also conclude is that written contracts are of vital importance; the caveat being that the contractual terms must reflect the reality of the working arrangements. As they say, plus ca change…

Paul Mason, Abbey Tax