Case Study

Dragonfly Consultancy Ltd lost its appeal to the High Court leaving its co-owner Mr Charles Bessell, a highly skilled IT system tester, facing a tax bill of £99,000.

The case was heard before the Special Commissioner in September 2007 who concluded that Mr Bessell would have been an employee had he been directly engaged by the AA. The reasons for this decision can by summised as follows: Mr Bessell worked fairly regular hours;  work was allocated to him by a Team Manager and he worked as part of a team; his role was similar to that of an employees; Mr Bessell provided a personal service.

• On appeal to the High Court, the decision was contended on four grounds:The Special Commissioner wrongly concluded that a limited right of substitution is not inconsistant with employment;
• The Special Commissioner wrongly concluded that the client had a sufficient right of control to justify the existance of a notional employment contract;
• The Special Commissioner wrongly concluded that the intention of the parties were irrelevant.
• The Special Commissioner failed to recognise the concept of ‘worker’ status, that is; a person may be self-employed without being in business on his own account.

The High Court considered these grounds in turn and this is the approach PayStream has taken here:

Substitution:

An unrestricted right for a worker to provide a substitute still points towards self employment. Dragonfly’s initial contract schedule requested Mr Bessell’s services personally with the later versions being amended so that the consultant remained nameless. Despite the amendments, the High Court concluded that it was the intention of both parties throughout the period that Mr Bessell would be the consultant, whether or not he was named in the schedule. Factors pointing to this were: the right of subsitution was not utilised; evidence from the AA that Mr Bessell was expected to do the work personally. Furthermore, the contract between the agency and the AA was silent on this point.

Advice for our contractors is therefore threefold: ensure the higher level contract between the client and agency contains a substitution clause and that the client is aware of this right; an unrestricted right to provide a substitute will continue to support your status as working outside IR35; utilise this right of substitution where ever possible. 

Control:

It is generally acknowledged that control can no longer be regarded as the sole determining factor. The fundamental question is whether the person providing the services is performing them as a person in business on his own account. It was written in the first schedule between Dragonfly and the agency, DPP that:

‘...we shall engage you to provide a consultant to perform certain services for you under your direct supervision and control.’

The High Court concluded, perhaps controversially, that the second ‘you’ refered to the AA. The later schedules were subsequently amended. The High Court was not naive in its approach and asserted that the changes were made because somebody had realised that an express reference to control would point towards a hypothetical employment contract between Mr Bessell and the AA. The court looked to Mr Bessell’s working relationship with the AA and found the following: work was allocated to him by a Team Manager; he attended weekly meetings; he received an ongoing informal appraisal of the quality of his work; he received the guidance of the team and its manager.

We advise you therefore to have your contract reviewed by an expert before the assignment starts although please note, any amendments should reflect the genuine reality between the parties; a worker in business on his own account would not normally expect to find regular monitoring of the kind described above; ask PayStream for advice about your specific circumstances.

Intention of the parties:

In a borderline case a statement as to the parties’ intention may be taken into account and help tip the balance one way or the other. This case was not felt to be sufficiently borderline to warrant taking the parties’ intention into consideration. The court also pointed out that in an IR35 case, there is no contract between the worker and the client, and therefore no actual contract on which they can state their intentions.

It is therefore still useful to have a clause relating to intention in your contract, in the event that your case is borderline. It may also assist your case if you ensure that the higher level contract between the client and your company has reference to the relationship between your business and the client. 

Worker status:

This ground of appeal was not accepted since the definition of ‘worker’ was said to exist only for the purpose of specific and self-contained statutory codes.

In Summary

This case has highlighted the need to ensure your contract has a strong substitution clause which could be used in reality. You should speak to your client to ensure all parties are aware of this right. It has also emphasised the need to remain independent from the client; if you are integrated within the client’s organisation or you receive control in the manner of your work, you should consider another way of working.   

PayStream has a Compliance Team skilled in assessing the contracts and working practices of your assignments. If you would like advice that is tailored to your circumstances, please feel free to contact us on 0800 027 2340.