Another IR35 victory in the construction sector helps us to keep abreast of how the Special Commissioners interpret the ever changing case law on employment status.
In January 2009, the Special Commissioners heard the appeal of J and C Littlewood (“JC Windows”) against HMRC’s decision that all of the workers engaged by J & C Windows were working as disguised employees, thus captured by the IR35 legislation.
As the appeal was being heard by the Special Commissioners, no new laws were
created or precedents set, but the case does give us an insight into how the Special Commissioners interpret case law that has been created in relation to IR35 and employment status.
1. Mutuality of obligations
The case provides us with a detailed analysis as to how “mutuality of obligations” has developed over the years.
In brief, when considering an ongoing relationship with a client, it is essential to consider both whether there was a lack of mutual obligation to offer/accept further work at the end of the assignment as well as whether there are mutual obligations during the assignment to offer/accept work.
Whilst this sounds straight forward, recent cases have adopted a wide interpretation of what will constitute mutual obligations. The obligation to undertake work and the obligation to pay for that work is considered enough to establish a mutuality of obligations.
This raises the bar for contractors to prove that they are truly independent from their client. Agreeing the scope of the work at the outset of the project or assignment will increase the prospect of being able to defeat any presumption that there is a mutuality of obligations between contractor and client. Ensuring that any additional work undertaken during the assignment is documented in the contract will also help, as will refusing work from a client.
Turning to the issue of substitution, it was interesting to note in this case that some of the workers had engaged and paid their own men to undertake work for J & C Windows. Others engaged family members to undertake their work whilst on holiday or used “helpers” to finish jobs for them.
The Special Commissioners took the surprising view where J & C Windows had paid the “helpers” directly, that this would not have a bearing on the workers’ IR35 status, as it would not amount to a sufficient right of substitution.
We have seen in previous cases that the courts have been keen to confirm that qualified rights of substitution are not enough to demonstrate that the worker is not a disguised employee. However, the Special Commissioner in this case took this a step further in stating that the occasional use of the right to provide a substitute is also not enough to show that there is no obligation to provide a personal service.
Therefore, any hint that the right of substitution is a limited or occasional power of delegation will be enough to render the right useless. This is a far cry from the High Court’s decision in 1999 that the mere right to provide a substitute was considered enough to dispel any obligation to provide a personal service.
This case was actually won on the issue of control. Once J & C Windows had acquired work on a building site, workers could choose whether to work on that site or not and where they did, J & C Windows did not control how or when the work was carried out. J & C Windows were only concerned about the work being completed on schedule so it did not incur any penalties.
The Special Commissioners also confirmed that the use of timesheets was insufficient to demonstrate that the client controls a worker.
4. Factors inconsistent with a contract of employment
There were several items taken into consideration when deciding whether there were any factors inconsistent with a contract of employment. These factors would also help to demonstrate that someone is in business of their own account and some were strong in this case, which would have swayed the Special Commissioner’s decision.
Financial risk / profiting from sound management In particular, the fact that the workers could profit from their own management was demonstrated by them being able to take a greater share of the purse available for that site where work was completed ahead of schedule. However any delays in completing the work meant that there was less money available at the end of the assignment to share around the workers that demonstrated that there was also an element of financial risk.
The workers having to undertake remedial work in their own time and at their own cost was also a factor that the Special Commissioners saw as pointing towards the workers not being disguised employees of J & C Windows.
Insurance The fact that the workers did not have their own insurance in place was something which pointed towards them being disguised employees. Whilst the Special Commissioner in this case did not see this as a decisive factor, it is an easy win for all contractors to help to demonstrate that you are in business of your own account. Clearly employees do not carry their own insurances, as there is no legal obligation to have such insurances in place, unlike limited company contractors.
Training The fact that the workers would reimburse J & C Windows for any training they undertook in respect of the work was considered a neutral factor. However, had they undertaken and paid for their own training, the Special Commissioner would have undoubtedly seen this as a pointer towards being in business of their own account.
Conversely, had the workers not reimbursed J & C Windows for the cost of the training, this would have been a factor which pointed towards them being treated as disguised employees.
There are some vital lessons which can be learnt from this case, particularly in terms of insurance, rectifying defective work in your own time and at your own expense, agreeing fixed prices for the entire assignment and agreeing the full scope of the work to be undertaken at the outset of the assignment are all good pointers which will help to defeat an IR35 challenge. It is important not to rely on the right of substitution alone when defending such a challenge as it is becoming increasing more difficult to succeed in this area.