While IR35 as we know it has only been in existence since it was first announced in 1999, by the Chancellor at the time, Gordon Brown. The cases that have helped to define it go back almost 60 years.
Commonly referred to as IR35, the Intermediaries Legislation (Chapter 8 of ITEPA), was enacted in 2000. Under Chapter 8, the contractors were required to assess their own IR35 status, and if they believed that the IR35 rules applied to them, then they were obliged to treat their income under what is known as the ‘deemed calculation’ https://www.gov.uk/guidance/how-to-calculate-the-deemed-employment-payment which results in the contractor paying tax and national insurance which are not vastly dissimilar to an employee.
However, under the off-payroll working rules which were first introduced in the public sector in April 2017 and then in the private sector in April 2021 as (Chapter 10 of ITEPA) which also sought to address a lack of transparency in decision-making experienced in the public sector.
The amended legislation didn’t change how IR35 was decided, but in the public sector, it took the responsibility for decision-making away from contractors and required all public sector bodies to determine the IR35 status of each and every engagement with a limited company contractor. In the private and third sectors, the responsibility for decision-making rests with all medium and large-sized businesses (small companies are exempt and the contractor retains the responsibility and liability under Chapter 8).
The off-payroll working rules also created a new entity: the “fee payer”: the entity which pays the PSC and is responsible for making the correct tax deductions. In both the public and private sectors, where the decision-making entity engages PSCs directly, they are both the decision-maker AND fee payer.
Where there are agencies in the contractual chain, the agency closest to the PSC takes on the role of the fee payer. As long as the entity has taken reasonable care in arriving at its decision, then even if the status decision proves to be incorrect, the fee payer agency is left with the liability.
IR35’s profound effects on end-client operations, recruitment agencies and contractors
By HMRC’s own estimates, these operational changes in the private sector will have affected some 60,000 end client engagers and has also required changes to the business practices of some 20,000 recruitment agencies. Off-payroll working has certainly had a profound effect on hundreds of thousands of contractors who have found their freelancer way of life being radically altered.
Employment case law that goes back a long way
The earliest employment status cases can be traced back to the 19th Century, but judgements made from the 1960s onwards have had the most significant impact on both employment status and IR35 because the factors determining each are much the same, such that the landmark case Ready Mixed Concrete (South East) Ltd v Minister for Pensions and National Insurance (1968) still typically forms the basis for the arguments by both sides in any employment, tax or IR35 status tribunals as it focuses on the key status factors which need to be addressed. Another seminal case followed a year later: Market Investigations Ltd vs Minister of Social Security (1969) which took a different approach to determining status with a greater focus on in-business factors, an approach which seems to have gained greater credence in some of the IR35 judgements in the 2020s
In terms of IR35 judgements, there are around 40 cases which have been decided at First Tier Tribunal and beyond since Lime IT v Justin in 2003, which was won by Accountax Consulting (now part of Markel Tax) and was the first in a string of such taxpayer victories achieved by our colleagues. There are a number of IR35 cases which are still being argued and at some point in the no too distant future, we also expect cases to be heard under Chapter 10. These may also have a bearing on those contractors who are still engaged by small companies or overseas entities with no UK presence and despite the April 2021 changes, still retain the responsibility and liability for Ir35 under Chapter 8.
Many of the cases that have shaped employment law and tax status are likely to be better known to those who work in law or taxation as a profession, but we have taken a look at some of the cases that have helped to frame decision-making around IR35, and what is deemed as ‘employed’ and what is deemed as ‘self-employed’.
Key examples of employment law cases
We look slightly more in-depth at some of the details in some of these important cases and highlight what the key points were in each case.
Ready Mixed Concrete (South East) Ltd vs The Minister of Pensions and National Insurance, 1968
. The case involved a lorry driver who worked for one company under supervision, direction and control, yet he was deemed as self-employed, and the main reason for this employment determination is because he provided his own lorry.
The ownership of significant assets, financial risk and the opportunity to profit are indicators of a contract for services and that in-business factors which demonstrate being “in business on one’s own account” should also be considered when determining employment status.
Whilst it is preferable when determining status to be able to demonstrate a genuine business operation, these factors are secondary to the three key factors of control, personal service / right of substitution and mutuality of obligations (MOO), but they can be used where the three key factors do not provide a conclusive result.
Indeed, despite some recent broadcasting cases where “in business” factors did take precedence, most Tribunal judges will consider these factors to paint the whole picture, but invariably the decision on the IR35 status of an engagement will be determined by the three key factors.
Key Points: The importance of being “in business” is relevant in this case, but its real importance lay in the fact that it defined the three key factors, which if all were present, determined employment. If the engagement requires an individual’s personal service; if there is mutuality of obligations (MOO); and the individual is controlled by the engager in the manner in which they undertake the services that they provide, then we have a contract of service (employment).
The judge determined that if one of these three factors was missing, then the engagement could not be a contract of service; therefore it must be something else; i.e. a contract for services (self-employment).
We can also take from this case that where we cannot determine on these three key factors, then we must look at other matters such as any in-business factors or which indicate the individual is taking financial risk.
Almost 60 years later, most commentators would argue that because of the nebulous nature of MOO, you would not want to argue self-employment because MOO has been denied, you would hope to be able to deny control or a requirement for personal service – preferably both.
MARKET INVESTIGATIONS v MINISTER OF SOCIAL SECURITY (1969)
This case involved a Mrs Irving (“Mrs I”) who had been engaged to induct interviews on a short term contract a number of times for Market Investigations Limited, which applied to the Minister of Social Security for a decision on whether Mrs I was for the purposes of the National Insurance Act, included in the class of employed persons.
- Company specified persons to be interviewed, questions to be asked, order in which and how many questions should be asked and how to probe for answers;
- Interviewers were supplied with an ‘interview guide’;
- Area organiser for the company was responsible for allocating the interviewers;
- Mrs I was free to choose her own hours of work;
- Interviewers were free to work elsewhere;
- Substitutes were not allowed to be sent without prior approval;
- When working in the field – no record of where or when interviewer will be working;
- Company paid the interviewers expenses;
- If there were frequent refusals, the interviewer would not be offered any further work.
Appeal dismissed (contract of service)
‘The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors, which may be of importance, are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.’
‘Is the person who has engaged himself to perform these services performing them as a person in business on his own account?’
Key points: There were no inconsistencies with a contract of service –nothing unusual for a contract of service to prohibit the individual from working elsewhere and is often present.
The control implemented by the company was somewhat limited; however, not evident that this fell within the inconsistences of a contract of service. The company’s officers were of the opinion they could not dismiss Mrs I, which was based purely on thought and not contractual. It is common for short term contracts not to include termination clauses. In addition, there was a lack of provisions for holidays, sickness or time off, which does not show an inconsistency with a contract of service, but rather, a common occurrence to short term contracts of service.
The fact that Mrs I was uncontactable when present in the field, is often common in contracts of service e.g. chauffeurs in the employment of a car hire company.
Mrs I did not own her own tools/equipment, was paid a fixed fee and therefore incurred no financial risk or the performance of her work reflect on the opportunity to make a profit.
Express & Echo Publications vs Tanton, 1999
Mr Tanton originally worked for the appellant company as an employee but was made redundant in 1995. In August 1995, he was re-engaged as a driver on what the company intended, and Mr Tanton initially accepted, to be a self-employed basis. During the time Mr Tanton was re-engaged, he exercised his right to send a substitute to complete his services.
The case went to the Court of Appeal where the original decision that Mr Tanton was deemed an employee was overturned.
The Court of Appeal held that the employment tribunal chairman had erred in holding that the applicant was an employee, rather than a self-employed contractor, even though the contract under which he worked contained a provision enabling him, at his own expense, to arrange for his duties to be performed by another person when he was unable or unwilling to perform the services personally.
Where a person who works for another and is not required to perform his services personally, then as a matter of law, the relationship between the worker and the person for whom he works is not that of employer and employee. A right to provide a substitute is inherently inconsistent with the existence of a contract of employment.
A contract of employment must necessarily contain an obligation on the part of the employee to provide his services personally. Without such an irreducible minimum of obligation, it cannot be said that there is a contract of employment. The recognition that a contract of employment involves mutual trust and confidence is consistent with a requirement of personal service.
Key Point: The right of substitution.
Carmichael vs National Power, 1999
This case involved guides who were working for National Power plc on a “casual as required basis”.
The company would offer work to Mrs Carmichael that he was free to accept or reject, while the company were under no obligation to offer work of any regularity.
The Court of Appeal determined that Mrs Carmichael was in fact employed, but this was overturned by the House of Lords who stated that there was a lack of any mutuality of obligation.
This case is an example for contractors to remember if they are engaged on a short-term specific and clearly defined contract that has no expectation of further work being offered once the task in the defined contract is completed.
Key Point: The lack of mutuality of obligations (MOO).
Montgomery vs Johnson Underwood, Court of Appeal 2001
Montgomery registered with Johnson Underwood, an employment agency, while looking for part time work as a receptionist/telephonist. She was subsequently offered a position with a local company, Orenstein & Kopple Ltd, where she remained on assignment for approximately 2 ½ years, being paid by Johnson Underwood.
However, Ornstein & Kopple Ltd had become dissatisfied with the number of personal calls Montgomery was making and requested that Johnson Underwood terminate her contract, which they did. This action led to a claim for unfair dismissal by Montgomery naming both Johnson Underwood and Ornstein & Kopple Ltd as her employers in the case application.
After consideration of the relationship, including mutuality of obligations and control, the Employment Tribunal found that Montgomery was engaged on a contract of service by Johnson Underwood. This is despite the Employment Tribunal finding that there “was little or no control, direction or supervision”.
Johnson Underwood appealed, however the Employment Appeal Tribunal agreed with the Employment Tribunals decision and the appeal was dismissed.
On further appeal the case was eventually heard before the Court of Appeal who found that the Employment Tribunal had erred in holding that Montgomery was employed by Johnson Underwood. The Employment Tribunal’s finding of fact that “little or no control, direction or supervision” could not simply be ignored and the Court of Appeal reverted to the seminal employment status case of Ready Mixed Concrete, covered previously in this article, which sets out the 3 key status factors that must be present for a contract of service to exist. Therefore, the lack of control, and to some extent the lack of mutuality of obligations, meant that Montgomery was not an employee of Johnson Underwood resulting in the appeal being upheld.
Key points: Without sufficient direction, supervision or control, or the right to exercise such, a contract of service (employment) cannot exist.
Find out more about IR35 and what it means for both the contractor and the fee-payer in our IR35 Hub. The IR35 Hub is packed with information, news and guidance, including an interactive IR35 tax calculator and an IR35 guide for contractors and an IR35 guide for fee-payers, both of which can be downloaded as pdf’s and kept for reference.
Are you looking for guidance regarding IR35 and contracts?
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Some UK employment case law examples that have helped shape IR35 include:
|1||Davies vs Braithwaite||1931|
|2||Gould vs Minister of National Insurance||1951|
|3||Mitchell & Eden vs Ross||1961|
|4||Morren vs Swinton and Pendlebury Borough Council||1963|
|5||Ready Mixed Concrete (South East Ltd) vs The Minister of Pensions and National Insurance||1968|
|6||Market Investigations Ltd vs Minister of Social Security|
|7||Construction Industry Training Board vs Labour Force Ltd||1970|
|8||Fall vs Hitchin||1972|
|9||Global Plant Limited vs Secretary of State for Health and Social Security||1972|
|10||Beloff vs Pressdam||1973|
|11||Massey vs Crown Life Assurance||1978|
|12||Addison and Others vs London Philharmonic Orchestra||1980|
|13||Young & Woods vs West||1980|
|14||Nethermere vs Taverna & Gardiner||1984|
|15||Hall vs Lorimer||1994|
|16||Barnett vs Brabyn||1996|
|17||Carmichael vs National Power||1999|
|18||Express & Echo Publications vs Tanton||1999|
|19||Battersby vs Campbell||2001||HMRC|
|20||F S Consulting Limited vs McCaul||2002||HMRC|
|21||Lime-IT Limited vs Michael Justin (Inland Revenue)||2003||Contractor|
|22||Synaptek vs Young||2003||HMRC|
|23||Tilbury vs HM Inspector of Taxes||2003||Contractor|
|24||Usetech vs Young (inc High Court)||2004||HMRC|
|25||HMRC vs Ansell Computer Services||2004||Contractor|
|26||HMRC vs Future Online (inc High Court)||2004||HMRC|
|27||HMRC vs Netherlane Limited||2005||HMRC|
|28||HMRC vs Island Consultants Ltd||2007||HMRC|
|29||HMRC vs Datagate Services Ltd||2007||Contractor|
|30||HMRC vs Dragonfly Consulting Ltd||2007||HMRC|
|31||HMRC vs MKM Computing Ltd||2007||HMRC|
|32||HMRC vs First Word Software Ltd||2007||Contractor|
|33||HMRC vs Alternative Book Company Ltd||2008||HMRC|
|34||HMRC vs Larkstar Data||2009||HMRC|
|35||HMRC vs Novasoft||2010||Contractor|
|36||HMRC vs MBF Design Services||2011||Contractor|
|37||HMRC vs Marlen Ltd||2011||Contractor|
|38||HMRC vs ECR Consulting||2011||Contractor|
|39||HMRC vs Primary Path Ltd||2011||Contractor|
|40||HMRC vs JLJ Services v HMRC||2011||Split Case|
|41||HMRC vs Armitage Technical Design Services Limited||2017||Contractor|
|42||HMRC vs Christa Ackroyd||2018||HMRC|
|43||HMRC vs Jensal Software Limited||2018||Contractor|
|44||HMRC vs MDCM Ltd||2018||Contractor|
|45||HMRC vs Albatel Limited (Lorraine Kelly)||2019||Contractor|
|46||HMRC vs Atholl House Productions Ltd (Kaye Adams)||2019||Contractor|
|47||HMRC vs George Mantides||2019||Split Case|
|48||HMRC vs Kickabout Productions||2019||HMRC|
|49||HMRC vs PAYA / Willcox / Allday Media [3 x cases]||2019||HMRC|
|50||HMRC vs Canal Street Productions||2019||Contractor|
|51||HMRC vs RALC Consulting||2019||Contractor|
|52||HMRC vs Northern Lights Solutions Limited||2020||HMRC|
|53||HMRC vs Red, White and Green Limited||2020||HMRC|
|54||HMRC vs Little Piece of Paradise Limited||2021||HMRC|
|55||HMRC vs Basic Broadcasting Limited||2022||Contractor|
‘A guide through the maze’ by Tim Warr