In the midst of IR35 reform for the public sector and proposed reform for the private sector, Qdos Contractor defended a client at a First Tier Tax Tribunal where the judge found in favour of the contractor (who had worked for a public sector organisation).
As the latest successfully defended case for Qdos, Andy Vessey - Head of Tax at Qdos Contractor - who defended the contractor to achieve the successful outcome, provides the below case study with first-hand insight to the case.
Jensal Software Ltd (JSL) provided business analyst services to the Department of Works and Pensions (DWP) via a series of contracts with Capita during the period May 2012 – April 2013. Following a lengthy enquiry the matter had to be finally settled at tribunal.
During the enquiry I had criticised a belligerent Status Inspector for his behaviour which I compared to the criticism levelled at HMRC by the Special Commissioner in the 2006 case of MAL Scaffolding when he said, “The Commissioners [HMRC] appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers there if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking.”
JSL were represented by myself as representative of Qdos and, to my surprise, HMRC appointed legal counsel from a leading set of barrister’s chambers in the UK, rather than from within their own department.
Together with mutuality of obligation (MOO), this appeal was won on the issue of control which HMRC have and continue to define very narrowly and rigidly.
JSL were engaged to provide expert advice to DWP in relation to the operational readiness of around 16 components of the Universal Credit Programme, an expertise that was absent from within their own organisation.
Once DWP had communicated their requirements, JSL were then left to get on with the services at their discretion. So, whilst DWP decided the thing to be done, the way it was done was left to JSL. Here, I drew parallels with 2007 Special Commissioners case of First Word Software Ltd v HMRC in which it was said that when considering whether the contractor was subject to a “sufficient degree” of control by the end client Reuters, it was borne in mind that Mr Atkins (contractor) was engaged for his specific expertise and only for a particular project. Furthermore, Mr Atkins was engaged to provide a “small piece of a large jigsaw” and the way in which that was done was left to him. Although Reuters decided the thing to be done, Mr Atkins decided the way it should be done and the means to be employed in doing it. This, along with other aspects of the area of control, was seen to be consistent with the conclusion that Mr Atkins acted as a sub-contractor, with responsibility for part only of a larger project and not as an employee. The judge agreed.
JSL took the initiative in terms of the way forward and determined how best to discharge consultancy across the project.
Although it would be necessary to attend progress meetings, it was essentially left to Mr Wells’ discretion as to whether to attend or not.
JSL contended that they were the driving force in setting out what needed to be completed and the timescale.
HMRC relied upon DWP evidence that feedback would be provided on the progress made by Mr Wells, regular meetings and discussions took place between the parties and that DWP were the ultimate decision-makers. Mr Wells, according to HMRC, was treated as a senior but temporary member of staff; his work was steered by DWP, the ultimate decision would be made by a DWP team leader and DWP monitored his work.
The upper level contract between DWP and Capita provided for progress reports to be requested from Mr Wells and controlled his conduct outside of work to the extent that he would “not engage in conduct detrimental to the interests of Capita or the Client.”
Whilst the DWP terms of reference stipulated a minimum requirement of 37 ½ hours to be worked within a week, this was not reflected in the lower level contract between JSL and Capita, nor did Mr Wells recognise such a requirement during the course of the contract. JSL did not work set hours as the services were based upon achievables and to timescales, and therefore the hours did sometimes vary.
Although Mr Wells was not aware of any requirement to work 37 ½ hours per week, his wealth of experience gained through many years of contracting taught him that working standard hours was the industry expectation.
HMRC maintained that Ian Wells was required to work at DWP’s Leeds site but this was where he chose to base himself and he was not restricted on where to carry out the services as sometimes the work would dictate the location. As much time was spent across various DWP sites, as was necessary, in order to gather and disseminate information central to the work. Both JSL and another contractor were working in 13 areas of DWP and moved about DWP offices as they saw fit.
Judge Jennifer Dean was satisfied that any instructions in relation to the assignment were, in reality, limited and that Mr Wells utilised his skills to decide what was needed, how those needs could be met and the timescales in which the task could be completed. Whilst the DWP would consider and agree JSL’s proposals, this did not amount to “supervision” as such, but rather to ensure that he understood the nature of the DWP’s request and that all workers understood how the task was to be carried out and any timeframes involved which would have a bearing on the work to be undertaken once JSL’s task was completed. The control aspect was also limited both in the Framework, which stated that Ian Wells could not be directed to undertake tasks outside the scope of the engagement, and in the upper level contract which required any variation to the terms of the agreement to be agreed in writing.
Although there was an expectation that Ian Wells would attend meetings there was no contractual obligation on him to do so and it was clear that this was no more than a practical necessity in order to keep DWP up-to-date with the progress of the project as a whole. The DWP witnesses agreed that Mr Wells was not line managed nor was he subject to the same level of supervision as employees at the DWP. Whilst the end client was ultimately accountable for JSL’s work, this did not amount to control such as would be expected of a manager over an employee but was more akin to the responsibility of ensuring that the needs of the DWP were met as would be required of any independent contractor engaged to provide a specific service.
There was no dispute that JSL was subject to minimum checks but the evidence of all of the witnesses, taken together with the documentary evidence indicated that the control to which he was subject was substantially less and clearly distinct from that over employees. Mr Wells’ involvement with the team of employees and frequency of meetings was no more than an indication of a professional and close working relationship. The level of control exercised did not go beyond that which was usual for an independent contractor.
Mr Wells was not therefore subject to the degree of control which would be necessary to constitute a contract of employment.
The judge’s conclusion regarding control is very timely as HMRC are doggedly applying an inflexible attitude to this most important of employment status factors in their ongoing plight to apply IR35 in as many cases as they can. Hopefully, this will serve as a reminder to the department that the Ready Mixed Concrete case of 1968, which still remains prominent case law, requires that a person is subject to another’s control to a sufficient degree to make the other their master, and not just the slightest hint of control.
On this most troublesome and misunderstood aspect of status, I applaud the judge for her willingness to explore and interpret MOO beyond the bounds of HMRC’s highly simplistic definition. She took the view that although Ian Wells provided his services for payment, MOO did not of itself demonstrate a contract of service. JSL were paid a daily rate upon production of invoice. Whilst an internal recruitment document set minimum daily hours of 7 ½, this was considered no more than an expectation as to the hours that would be worked each week and payment was made irrespective of the hours worked.
JSL’s contracts each lasted 3 months and there was a break between the penultimate and final contracts of approximately 2 weeks which indicated that there was no contractual obligation for the DWP to provide continuous work.
JSL’s engagement did not extend beyond the specific project in which Mr Wells’ skills were required. The position was borne out by the fact that there was a period during which one contract ended and the DWP was under no obligation to offer a further contract. No further work was offered for a short period. The final contract was terminated on 04.04.13 by JSL with immediate effect before its natural end date because of an opportunity that arose with Lloyds Banking Group.
The essence of the relationship was that there was no continuing obligation on the part of the DWP to provide work; if it chose to abandon the project there was no contractual basis upon which JSL could demand further work.
These factors, therefore, pointed away from a contract of employment.
HMRC are very quick to dismiss what they consider a fettered right of substitution but the judge was having none of this. Whilst JSL’s contractual right of substitution was slightly tainted by the requirement of DWP’s agreement to any proposed substitute’s skills and security checks, there was no restriction on the right being invoked in specified circumstances, e.g. in the event that Mr Wells was unable to carry out the work. In reality, if Ian Wells simply decided he no longer wished to work on the project he could have relied upon his contractual right of substitution.
During the enquiry, both my client and I attempted to clarify the reality of the substitution clause with Capita. In an e-mail, I asked the agency two questions:
Q. “JSL could have utilised a substitute at any time during the contract, i.e. a named substitute did not have to be disclosed at the very outset?”
A. “Absolutely, this is something that can be done at any time during the contract and does happen.”
Q. “As an estimate, if JSL had wanted to send a replacement worker, how long would it have taken for Capita and DWP to have satisfied themselves that the proposed substitute being suitably qualified and skilled?”
A. “A substitute consultant can start as soon as they have provided all of the necessary vetting and screening requirements to Capita. By this, I mean everything we need from a regulatory perspective (proof of right to work in the UK, any required references, identity documents etc), and any proof of specifics for the role (required qualifications, experience). Once this has been obtained they can start working.”
The judge therefore concluded that a right of substitution existed in the hypothetical contract and whilst it was never called upon, nonetheless it shifted the balance away from employment.
I would pay tribute to my client whom I had no qualms of placing in the witness stand. Mr Wells is somewhat of a veteran when it comes to IR35 and he delivered his evidence most competently. He put in a lot of hard work and endured the stress of a lengthy enquiry and tribunal experience. Also, to the two DWP witnesses who, whilst called upon by HMRC, ironically turned out to be more beneficial to JSL’s case because of their honesty and integrity.
Rather unusually and also unluckily, this was the second IR35 enquiry Ian Wells has had to endure during his company’s lifetime. Whilst lightning struck twice he has come out the other side, maybe not fully unscathed but certainly smiling.
Many will no doubt be scratching their heads as to why HMRC ever allowed this case to reach tribunal. Had they been reasonable and pragmatic then there would have been no need for such. In my opinion, their decision was influenced by the fact that the end client was a public sector body and they were desperate to send a warning shot across the bows of other contractors working in that sector. It was a gamble that thankfully backfired and now they have made matters worse for themselves by providing freelancers with some ammunition to fire back at them.
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