Hopes were raised that the Government would take the opportunity in the Budget on 23 March 2011 to abolish IR35 – the intermediaries legislation variously described as the ‘personal service company’ or ‘disguised remuneration’ rules.
New and improved?
Unfortunately, the Government did not dispense with IR35. The reason given for retaining the legislation was as follows: “The Government has decided that it cannot put substantial tax revenue at risk and has therefore decided to retain IR35 and to achieve simplification by making improvements to the way in which it is administered.”
What the Government means by ‘substantial tax revenue’ is not altogether clear. Back in 1999, the Government estimated that IR35 would raise £220 million a year in National Insurance Contributions (NICs) and a further £80 million in income tax. However, in the tax years 2002/03 to 2007/08, IR35 directly raised only £9.2 million – a derisory average of around £1.5 million a year.
The Government ‘improvements’ to IR35 administration include providing greater pre-transaction certainty about whether businesses are caught by the provisions (e.g. a dedicated Helpline, clearer published guidance, and risk-based reviews by specialist teams). The announcement in Budget 2011 of a potential future integration of income tax and NICs had resulted in speculation that IR35 may no longer be necessary. However, full details of the proposed integration have not been published at the time of writing. In the meantime, we appear to be stuck with IR35.
In the recent case MBF Design Services Ltd v Revenue and Customs [2011] UKFTT 35 (TC), the company (MBF) appealed against income tax determinations and a notice of decision for NIC purposes. MBF provided design engineering services through its sale director, Mr Fitzpatrick, to Airbus UK Limited. The issue was whether Mr Fitzpatrick would be an employee of Airbus under a hypothetical contact between them.
The tribunal considered contracts by which Mr Fitzpatrick’s services were supplied to Airbus, together with the tax and NIC legislation and substantial amount of case law on the subject.
Influencing factors
The overall impression of the tribunal was that the arrangements and circumstances gave rise to relationships typical of a contract for services. The tribunal also considered whether the practical reality of the work arrangements altered the conclusions it reached about the contracts. It found as follows:
• There was no real thought that Mr Fitzpatrick might send a substitute to discharge his obligations (notwithstanding the contract terms). However, this was not inconsistent with being engaged as a professional whose expertise was valued.
• MBF’s negotiation of fees for new work is typical of how an independent provider would proceed. By contrast, on employee would tend to lean towards career structure and advancement as a means of improving remuneration.
• The checking and approval of design work was an “inevitable necessity”, which would have has to be present in respect of any work done for Airbus. Thus there was little difference between the position of employees and service providers. However, other differences existed e.g. an absence of disciplinary or grievance procedures for contractors, having to rectify errors at their own expense and their liability to be laid off without notice.
• On-site working was not considered to be a conclusive indicator of employment. Mr Fitzpatrick’s design work normally had to be performed on site and with Airbus’s equipment because there was “no other sensible way to do it”
• The variation of Mr Fitzpatrick’s pattern of working which in fact occurred (e.g. start and end times) did not seem to be typical of normal employee working habits.
• Other factors distanced Mr Fitzpatrick’s situation from that of an employee (e.g. weekly invoices for hours worked, the absence of holiday or sick pay, employee benefits and employer-provided work related training).
The tribunal found that the evidence did not show that Mr Fitzpatrick was ‘part and parcel’ of the Airbus organisation, and commented: “the parties’ plan intention, shown both in the contracts and in practical ways, was not to create an employment relationship”. The taxpayer’s appeals were allowed.
For such relativity young legislation, IR35 has apparently spawned a disproportionate amount of case law. It is hoped that the Government improvements to IR35 procedures will obviate the need for taxpayers to argue their case before the tribunal in many cases.
HMRC ‘help’
An interesting postscript to the above case is that evidence was given in the form of a witness statement by an Airbus employee who led a team of employed and contracted designers including Mr Fitzpatrick. The employee was of foreign origin and the tribunal observed that he has a limited command of the English language. HMRC had prepared the individual’s witness statement for him. However, he had considerable difficulty in reading it out, and was hesitant and uncertain under cross-examination. The tribunal was not satisfied that he fully understood the contents of his own witness statement.
Note – Since completing this article, the taxpayer has been successful in a further IR35 case, ECR Consulting Ltd.
The above article is reproduced from ‘Practice Update’ (May/June), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.