This case solidified the notion that it is important to consider each element of IR35 separately (for example: substitution, control and mutuality of obligation) as the failure of HMRC to win on any count will ultimately defeat their case. This decision was made despite the lack of reference to a specific project or body of work in the contractual documentation that was signed with the recruitment agency.
Mark Fitzpatrick was providing design services on behalf of his own limited company (MBF Design Services Limited) through recruitment agencies to Airbus. MBF Design Services Limited was engaged with this client between 2001-2003 and 2005-2007 for a fixed period of hours.
Firstly, the tribunal considered the contracts in place for this agreement. The chain of contracts was as followed: MBF were engaged with GED Sitec who in turn contracted with Morson and finally with Airbus. Both contracts with GED Sitec and Morson had the necessary IR35 indicators present such as mutuality of obligations, substation and control. This ensured MBF was off to a good start as the paperwork made it more difficult for HMRC to argue that an employment relationship existed between Mr Fitzpatrick and Airbus.
Secondly, the tribunal assessed the working practices of Mr. Fitzpatrick. Mr Fitzpatrick was able to present his interpretation of events personally. In addition, HMRC had employees of Airbus at the hearing to act as witnesses.
The tribunal highlighted the importance of the considerations of control: what work is being completed; where the services are carried out; when the services are provided and how the services will be completed.
It was emphasised that it would be reasonable for a client to have a degree of say in where, when and what. However, ultimately, the contractor should be the master of his own assignment and retain autonomy over the services. As a contractor should be a specialist who has been hired due to the absence of said skill in the workforce, they should be able to determine how the work is completed. If this is not the case, it is likely that the contractor is controlled.
If a client allocates or co-ordinates work, then is unlikely to amount to sufficient control. However, if a contractor is required to obtain approval of work or regularly has their services checked, then this can suggest the contractor is controlled. It is also important to note that a particularly problematic issue is when contractors work fixed hours. This can act as validation that a contractor is under supervision, direction and control of the client.
Despite the fact that MRF had never exercised substitution in practice, it was clear from the contract that there was a theoretical right for MBF to provide a substitute for Mr Fitzpatrick should the need arise.
One detrimental factor to HMRC’s case was the fact an Airbus employee (who was responsible for the work undertaken by MBF) confirmed that it would have been impossible for MBF to provide a substitute.
As a result, this case highlights that it is not necessary to provide a substitute in practice. The element of substitution can be satisfied by a right to substitute within the contract and the agreement of substitution from the client. A contractor should seek written approval regarding substitution from the client via either a confirmation letter or via a signed contract containing a substation clause. This evidence will be invaluable in the event of a HMRC enquiry as it will prove the right of substitution has been recognised by all parties.
MUTUALITY OF OBLIGATION
The turning point for this case was the reliance on the no notice period in the contract. This had been exercised in practice where MBF had been sent home without pay on a number of occasions. For example, MBF was sent home when work was deferred or during computer downtime. In contrast, the employees of Airbus were expected to remain present on site and engage in other activities.
Mutuality of obligations is an incredibly difficult element of IR35 to establish. This is because mutuality of obligations is present in all relationships, for example there is an obligation on one party to work and an obligation on another party to remunerate for the services. MBF successfully rebutted the existence of employment-like mutuality of obligations as Airbus was not required to pay MBF when no work was produced. Moreover, MBF evidenced refusal of work on particular projects. This proved highly significant.
The tribunal stressed the dangers of engaging in an ongoing arrangement. This can suggest employment-like mutuality of obligations regardless of the intention to continue the services.
IN BUSINESS OF OWN ACCOUNT
Firstly, Airbus confirmed that any major re-working would have been the responsibility of MBF, thus completed at MBF’s expense.
Secondly, MBF was able to demonstrate that Mr Fitzpatrick was in business of his own account through working with 3 other clients before and after his engagement with Airbus.
Thirdly, Mr Fitzpatrick received some training from Airbus which could have detrimental to his employment status. However, this was counteracted by the fact Mr Fitzpatrick received additional training which he paid for through his limited company during the investigation.
OTHER FACTORS TAKEN INTO ACCOUNT
The tribunal considered that the following evidenced MBF was an independent consultant: being excluded from the client’s holiday and sick pay benefits; pension, car and healthcare schemes; exclusion from social functions; submitting VAT invoices for work and being physically identifiable as a contractor by wearing a different security pass.
Overall, on balance the tribunal correctly determined that an arm’s length relationship between MBF and Airbus existed. Therefore, the employment relationship claim by HMRC was unsuccessful.