Analysis of the Synaptek IR35 decision
Mr Justice Hart delivered his judgement at 10am this morning. I was at the High Court to hear the verdict and receive a copy of the Judgement.
He dismissed the appeal by Synaptek Limited against the finding of the General Commissioners that Gordon Stutchbury of Synaptek Limited would have been in employed earner's employment with its client, EDS, had the circumstances been in the form of a contract between Gordon Stutchbury and EDS, that is that he was caught by the IR35 legislation as a disguised employee.
In his judgement Justice Hart briefly reviews the background to the legislation and sets out the basic facts of the case. These have already been covered in our earlier reports on the High Court appeal. There are some interesting points amongst the Judge's observations on the background.
Issues of fact or law?
Perhaps the single most critical issue that the judge had to decide was whether assessing the notional contract is a matter of law or one of mixed fact and law? Mr Stutchbury's Counsel had argued long and hard that constructing the notional, hypothetical contract between the worker and the end client, that IR35 requires, was a matter of law not fact.
However, Mr Justice Hart disagreed. As I feared at the time of the appeal Mr Justice Hart was not convinced on this argument and once that fell down many of the detailed status issues became far less important.
This distinction between matters of law and matters of mixed fact and law was vital as matters of fact or mixed fact and law are for the Commissioners to decide. As the judgement notes the High Court "can only interfere if it concludes that the decision reached by the Commissioners is an impossible one on the facts found by them or that they have misdirected themselves."
Had it been a matter of law and not mixed fact and law then the High Court is free to substitute its own opinion. As the judgement notes "In a context where the answer to be given depends on the relative weight to be given to a number of potentially conflicting indicia, the distinction may be of critical importance".
Having concluded that it was up to the Commissioners to determine the facts there was far less scope for Mr Justice Hart to take issue with the way in which the Commissioners may have weighed up the relative indicators of employment and self employment.
Substitution
"although there was a right of substitution in the event, for example of Mr Stutchbury's illness, consent was never sought. Any substitute would have had to be suitably qualified and meet with the approval of EDS"
On the face of it this looks somewhat worrying as experts have long claimed that a right of substitution is almost a golden bullet as far as IR35 is concerned. However the details of the contract bear closer examination. In clause 9.1 of the contract (which is reproduced in the judgement) it states that:
" In the interest of continuity the Company shall use its bests endeavours to procure that the Services are provided by the Company Employee personally but may with the consent of the Client substitute alternative personnel subject to procuring that such alternative personnel are bound by the the terms of this agreement"
As a substitution clause this leaves a lot to be desired as it gives the client carte blanche to veto any substitute. Mr Justice Hart's reference to "suitably qualified and meet with the approval of EDS" does not come from the substitution clause. The only clause that refers to this matter is clause 10.2 which includes reference to:
" The Company shall be responsible for ensuring that the Company Employee, and any other person provided pursuant to these terms, has the necessary qualifications and competence for the proper performance of the Services..".
Had the contract given Synaptek a right of substitution where the client could only reject the alternative person in the event that they did not have "the necessary qualifications and competence" then it would have been much harder for the Judge to conclude that the contract:
" does not give Synaptek any right to perform the services by anyone other than Mr Stutchbury. The effect of the contract is that, unless and until agreed otherwise, the services do have to be performed personally by Mr Stutchbury"
In business on your own account
Another key issue for Gordon's case was whether, having found he was in business on your own account, the Commissioners could still find that he was caught by IR35?
Stutchbury's counsel cited the Market Investigations case and the case of Davis v Braithwaite. The judgement notes that Counsel argued "that once it is established that a person was in business on his account that is an extremely powerful pointer to the fact that the particular engagement by the individual is one for services rather than of services".
In the judgement Mr Justice Hart concluded that "the fact that Synaptek (and notionally Mr Stutchbury) was in business on his own account is no doubt an important contextual circumstance to be taken into account in determining whether the particular notional contract under which Mr Stutchbury was engaged by the client was one for services or of service. But it is no more than that.".
This confirms that it remains an important consideration although not one that in itself provides a complete answer to IR35. Mr Justice Hart concludes that the weight to be given to it was "a matter for the General Commissioners" and that "they took it into account". Again it appears that Mr Justice Hart, having concluded that the Commissioners had considered it, did not feel able to review the Commissioners' judgement on the issue.
Mutuality of obligation
Mr Justice Hart considers that this was the main point in the Synaptek's case – that there was no mutuality of obligation between Synaptek and EDS. He noted that the main argument put forward at the Commissioners was that EDS were not required to provide work for Synaptek and Synaptek were not required to work for EDS.
The judgement is helpful in noting that Counsel for the Revenue "accepted that if, taking the period of the notional contract as a whole, EDS was under no obligation to provide work, the necessary element of mutuality was indeed lacking for that period.
However, the judge did not agree with Stutchbury's counsel that this was the case here. Stutchbury's case appears to have been argued largely on the basis that once the contract with EDS was completed Synaptek could decide to move elsewhere and also on the basis that the contract between Synaptek and NESC (the agency) provided in clause 6.4 that:
" In any event no payment will be made by NESCO to the Company in respect of any contractual period not actually worked including notice periods".
Mr Justice Hart concluded that the purpose of the provision is to "emphasise that payment is dependent not only on the completion of proper timesheet and invoices, but also on actual work having been done. It does not in, my judgement, detract from the obligation on the client reflected in Clause 4.3 (of the contract) 'to allocate work to the Company.'"
He also adds that "if the contract is read as containing no obligation on the client to provide work, it is quite impossible to see what purpose is served by the termination provisions in Clause8"
This is an interesting comment and will require further analysis as to its import. It may be that it will be seen as requiring contracts to have no notice periods in order to show clearly that there is no mutuality of obligation. The judgement also appears to suggest that freelancers will need to be able to show that unlike employees they do not get paid when for reasons beyond their control – for example – a power cut or strike at the client they are unable to carry out their tasks and therefore do not get paid.
Final judgement
In his decision Mr Justice Hart notes the various factors that point towards self-employment and towards employment. For self-employment we have:
1. The fact that Stutchbury was (notionally) in business on his own account
2. The limited control by EDS of time at which and manner in which Mr Stutchbury performed the services
3. The right of substitution
4. The fact that Synaptek was responsible for Mr Stutchbury's training and the provision of computer facilities at its own premises
5. The provisions in the NESCO contract that assigned IPR to the client.
6. The requirement for Synaptek to have professional indemnity insurance in place.
7. The flexibility of hours that Mr Stutchbury worked in practice.
8. Use by Mr Stutchbury of his own reference books which were tools of his trade.
Against these factors Mr Justice Hart listed 5 pointers to employment:
1. That the minimum hours to be worked were broadly equivalent to a normal working week.
2. That the only financial risk borne by Mr Stutchbury was the insolvency of NESCO/EDS.
3. That the duration of the contract was for a fixed period (of 6 months) rather than in relation to the completion of a particular project.
4. That Gordon Stutchbury worked alongside EDS employees and was sufficiently integrated with its workforce to have a line manager and
5. That there was a requirement in clause 4.4 of the NESCO agreement that he comply with all EDS instructions
Mr Justice Hart goes on to state that:
"The relative weight to be given to the various factors ….was a matter for the Commissioners. It is not possible, in my judgement, to say that they were wrong in law in the conclusion at which they arrived"
It is an unfortunate aspect of the case that because of the nature of an appeal the relative weighting of the above factors cannot be examined and that the basis on which the Commissioners reached their decision is not open to review. Nothing in the above assessment of self employment versus employment is particularly new or contentious. The point about working alongside EDS employees and having a line manager pointing toward being integrated seems very flimsy. So too is the comment about financial risk. Overall nothing here appears to significantly change the accepted approach to assessing status for IR35 purposes.
Overall Mr Justice Hart concludes:
"If (as I have held) the Commissioners did not misdirect themselves in law, there plainly was evidence before them which made the conclusion which they reached a possible one"
This illustrates the difficulty that has dogged this appeal all along. The Revenue merely had to show that the decision reached by the Commissioners was "a possible one". Not that it was the decision that every set of Commissioners would have reached or that it was a decision that Mr Justice Hart would have reached.
A different set of Commissioners may well have reached a different decision. In that case the Revenue would have faced an equally difficult task appealing the decision. In all likelihood had the Revenue lost at the Commissioners they would have left the decision lie there and not take it to the High Court where it can set a precedent.
Had Gordon won then it would have been hailed as a well deserved victory for a freelancer who appears to have been very ill-served by his local General Commissioners. Their decision still seems manifestly wrong even if the EDS contract was not the best one to have tried to defend. However, as we feared, Mr Justice Hart has concluded that the Commissioners' decision was not perverse based on the facts they established and considered.
Conclusion
So what are the implications for freelancers as a whole? My initial feeling is that this case has generated more heat than light for IR35 and does not do much to change the accepted wisdom on the status of freelancers. It does clarify that assessing the notional contract is a matter of mixed fact and law – but this seems to be of importance only when considering the scope of an appeal against a decision of the Commissioners.
I do not think the issue of substitution has been affected by the judgement. The Synaptek substitution clause was not a good one and, as a result, has had little impact on Gordon's status. Mutuality of obligation remains a contentious issue, which still needs to be clarified further.
Being in business on your own account remains a significant factor for self employment but it remains unclear as to when this issue will override a weak contract. The Revenue's own example of Charlotte still suggests that having other clients in parallel with a main contract is important. It is perhaps unfortunate that in his own correspondence with the Revenue Gordon appeared to downplay the importance of his other contracts and sources of income.
One lesson is clear – sending your contracts to the Revenue for an opinion does not seem to be a wise move. Deciding to deal with the Revenue by yourself when they challenge your status is not a wise move and taking your own case to the Commissioners is not to be recommended. This case confirms that Freelancers need to have expert guidance in organising their affairs so that they demonstrate as positively as possible their business like nature and expert assistance once they get into disputes with the Revenue on status matters.
I will be considering the implications of this judgement with the Freelancers Outside IR35 (FO35) update committee and subscribers to FO35 will be sent any amendments (if any) that we consider necessary as a result of this case.
My initial reaction is that those following the guidance contained within FO35 can still claim to be outside IR35, backed up by insurance against penalties and, unlike Stutchbury, supported by professional representation from the outset of any claim.
In addition I will (together with Simon Sweetman) be discussing the implications of this at the UKTECH conference on April 10th.