HMRC lost control in latest IR35 case

IR35 victory for contractor despite requirement for personal service

At last a bit of good news to hearten freelancers – a contractor winning their IR35 appeal at the First-Tier Tax Tribunal.

Mr Daniels is the director and fee earner of MDCM Ltd. He has a long experience in the construction industry with a background in quantity surveying. In 2004 he formed MDCM Ltd which provides construction management services, including night shift management.

Company background

Many construction companies only employ a limited number of staff to keep down overheads. When there is a demand for work on a specific project, these companies will hire additional workers for the duration of the project. This can necessitate the need for a night shift manager who, like a day manager, is responsible for the site including the work done by sub-contractors, co-ordination of suppliers, safety issues, and other matters associated with overall site supervision.

The contracts

In October 2012, MDCM began working on a contract with construction firm Structure Tone Ltd (STL) via an agency called Solutions Recruitment Ltd. The contract required Mr Daniels to work as a night shift manager in London. Mr Daniels was not interviewed and Mr Philpott, the finance director of STL, had not even heard of him until HMRC took up their enquiries. The contract finished around April or May 2013 but STL had need of a night shift manager at another project in the capital and offered the work to MDCM who accepted and worked on this until July 2013.

MDCM were paid a daily rate of £310 which would be invoiced at the end of each week following submission of a timesheet signed off by STL. HMRC actually accepted that being paid a daily rate for work done was a pointer towards self-employment!

Working arrangements

Control

Mr Daniels had to work during established shift times of 17:30 – 07:00 Monday – Friday, although if all the work had been done for that shift, he was at liberty to leave early. This also included some weekend work but was stopped due to concerns about working excessive hours.

As night shift manager, Daniels reported to the project manager, Mr Hawes, who at the start of the shift provided him with a list of instructions on matters that needed to be done. According to Daniels however, Hawes was only on site once a week to take a cursory look around.

HMRC contended that control by STL was the most important factor and argued that:

• As Daniels was required to work shift patterns, STL controlled his working time.
• STL controlled how Daniels carried out the work in that he was required to report to the project manager who directed Daniels by giving him a list of instructions on matters that needed to be done during that shift. He was also required to manage the site including making sure the correct workers were on site, ensuring that the work was being done safely, and be point of contact for all workers.
• STL decided where the work was to be done.

Daniels argued that the only control exercised was that which necessarily came with the operation of large scale construction sites which lays down the structure of the programme and timeline for the execution of the construction activities. In other words, when he went on site there would be work to be done, but that was dictated by the phase of the construction programme. During the shift, however, he could organise matters as he saw fit and his supervisor would only visit once a week.

Whilst the tribunal agreed that STL directed what Daniels had to do during the shift, they considered this no more than telling him what needed to be done on site by the contractors which Daniels supervised.

The tribunal found no evidence that STL controlled how Daniels carried out the work beyond him having to wear STL safety equipment. He may well have been supervised but Mr Hawes only visited occasionally and Daniels was left to his own devices during the shift.

When the first project ended, STL had to ask for Mr Daniels agreement to work on the second project which indicated that STL had no power to direct where Daniels would work.

The tribunal therefore agreed with Daniels that STL did not exercise any more control on the site than they would over an independent contractor.

Personal service

In the upper level contract between the agency and STL, Mr Daniels was described as being the representative of MDCM.

Whilst MDCM’s contract with the agency provided for a right of substitution, this was unrealistic as STL required Daniels to carry out the services. On those days that Daniels gave notice that he would not be on site, STL contacted the agency themselves to arrange for a replacement worker. The substitute would be paid under separate arrangements, but MDCM would receive no fee. STL never asked Daniels to provide a substitute and nor would they accept that the right existed.

Termination

The contract was open ended but when it finally came to an end on 19^th July 2013, Daniels was afforded no notice period and did no more work after that date, with no severance payment. This was in keeping with the agency contract that related to the STL engagement which stated the notice period as being “N/A”.

The tribunal found that there was no requirement on either party to give notice to terminate the contract, nor for any entitlement to severance pay or pay in lieu.

Financial risk

Mr Daniels lived in the West Midlands and would stay at a hotel in London, sleeping during the day. Hotel costs were typically £75 - £100 per day and subsistence £25. These costs were not reimbursed by the agency or STL. HMRC had sought to argue that the daily rate of £310 included reimbursement of travel costs but this was dismissed by the tribunal. Nevertheless, the tribunal did not consider this a significant financial risk, as employees often bear travel expenses.

Although MDCM took out its own insurance as required by their agency contract, STL provided third party insurance for Daniels whilst he was working on site.

Equipment

STL provided Daniels with personal protection equipment – high visibility vest, gloves and hard hat. He had access to the STL on-site computer but was not provided with a mobile phone and used his own when working on site.  

Integration

Whilst on site, Daniels would be STL’s representative, wearing STL’s branded high visibility jacket and hard hat in order to be identifiable as the contact point amongst the contractors. Daniels did not however participate in STL meetings or functions.

The tribunal found that Daniels was not part and parcel of STL’s organisation.

Employee benefits

HMRC argued that as an employee of MDCM these were a matter for the PSC. However, the tribunal would not accept such a dismissive attitude as the IR35 legislation requires construction of the hypothetical contract and, as such, Mr Daniels would not be entitled to any sick pay, holiday pay or any other employee type benefits.

Decision

Whilst the requirement for personal service and lack of financial risk pointed to an employment relationship, the tribunal did not accept HMRC’s arguments about control.

The nature of the payment arrangements, total absence of any notice period and no entitlement to any employment benefits were also inconsistent with employment, leaving the tribunal to conclude that MDCM’s contract was not caught by IR35. The PSC’s appeal against the tax and NIC assessments for the two years ended 5^th April 2014 were therefore allowed.

HMRC are taking a very narrow-minded view of all aspects of control to the extent that virtually all contracts, whatever their nature, display some right of control over the worker by the end client. It is refreshing that this tribunal judge brought some common sense to this issue but I doubt that this will dissuade HMRC from diverting from their bullish and arrogant attitude regarding this most important of status factors.