Future On Line loses IR35 case at Commissioners
Special Commissioner, His Honour Stephen Oliver QC, who was the Commissioner who ruled in favour of the freelancer in the Tilbury Consulting case in the autumn of 2003, has now evened the score by siding with the Revenue in the case of Future On Line Ltd (appellant) and SK Faulds (HM Inspector of Taxes).
This decision was handed down on 31 March 2004 following a hearing where the company was represented by David Allen, of JSA Services Ltd and the Revenue were represented by A J Mear, Inspector of Taxes. The Revenue were also supported by evidence from Mr Chris Elder who had been employed by EDS from 1995 to 2003 as a project manager with the key role as the "delivery manager", which involved running the project at an operational level on a day-to-day basis.
Background
The case involved freelancer Mr Shane Roberts, an IT expert, and his company Future On Line Ltd (FOL) and a contract it had with EDS, via an agency Elan, providing testing services to the Department of Work and Pensions. This was meant to be a three-month contract starting in July 2000 but it eventually ran for three years following a number of extensions. It is not clear from the judgement whether the Revenue's challenge came as a result of having submitted the contract to the Revenue for an opinion or as a result of an employer's compliance review.
Shane Roberts was employed as a consultant by FOL, a company he set up in 1997 and owned 50/50 with his wife. Having seen a position advertised by Elan Computing Ltd ("Elan") on the web, Mr Roberts spoke to Elan and an interview was fixed for the next day in Newcastle with an EDS contractor. From then on Mr Roberts was not aware of Elan playing any part in the process. In the course of the interview Mr Roberts and the EDS contractor discussed and between them redefined the project. Mr Roberts was offered the contract. He accepted and started work the next week carrying out the functions of a test leader.
Two contracts were created. One was between FOL and Elan ("the FOL/Elan contract"); the other was between Elan and EDS ("the Elan/EDS contract"). The FOL/Elan contract stated that FOL will provide the services of Mr Roberts (or such other consultant of FOL that FOL may provide in accordance with clause 1.4) to EDS at "the Site" (i.e. Washington or Longbenton in Durham) for "the Term" (3 months).
Clause 1.4 enabled FOL to provide a substitute consultant with the written consent of EDS. In return Elan agreed to pay FOL £45 per hour for 37.5 hours a week plus travelling expenses plus, where EDS has approved and signed the Work Progress Form, amounts for work done in hours in excess of 37.5 a week – so long as these work hours have been agreed in advance with EDS. The FOL/Elan contract was terminable by Elan in certain situations such as FOL's failure to provide Mr Roberts' services to EDS and in any event on four weeks' written notice.
In the Elan/EDS agreement Elan agreed to supply the services of various contractors, on submission by EDS of a "Purchase Order" in respect of that contractor setting out the relevant details as to payment, job description, location, duration, line of reporting etc. Elan also agreed to procure that the contractor will maintain the required standards of professional behaviour; and any breaches will result in termination of the Purchase Order. Furthermore, Elan undertook to require the contractor to comply with any reasonable terms and conditions specified in relation to any particular Purchase Order.
The first Purchase Order dated 21 July 2000 is for the "Professional services of Shane Roberts to work as a systems engineer". It required that "any hours to be worked to be carried out in accordance with instructions by Heidi Gillard or nominee" and that "time sheets must be attached to all invoices and sent to Accounts Payable Department in order for payment to be made."
The professional services to be provided by Mr Roberts to EDS related to EDS's agreement with the Department of Work and Pensions (DWP) to install the Child Support Reform (CSR) programme. The previous programme had been found to be unreliable. This one, originally to be installed over five years, was required to be implemented within three years. Mr Roberts' work was directed at the testing stage. At the start of the engagement Mr Roberts' position was as system test team leader. Within a few weeks Mr Roberts was "promoted" to "build manager" with responsibility for a particular phase of the project. The unfortunate use of the phrase "promoted" was apparently the way that Mr Roberts referred to his change of roles.
The evidence from Mr Roberts was that he had been the first person employed in this role. His first task had been to create templates required for the testing system. These had been designed as a temporary measure but remained in use throughout the project. It had been left to Mr Roberts to monitor and record testing progress. Mr Roberts was given no specific guidance as to the carrying out of this work. The CSR system had to be tested to meet the requirements catalogued by the DWP. Mr Roberts saw his role as ensuring this objective no matter how unpopular this made him with the development team whose output was being tested.
The Commissioner heard that in the course of the project Mr Roberts assembled a team to carry out the necessary testing and personally interviewed some 160 staff. Mr Roberts shared his expertise with those members of the team and made himself available to advise and assist them when they met technical problems. He allocated work between team members and ensured that the team as a whole met its objectives. It is not clear from the evidence whether these aspects of the role were included within the initial contracted services.
The CSR project was under the overall management of the chief executive. In his capacity as system test team leader Mr Roberts' project line manager was the test manager. As build manager Mr Roberts had work allocated to him and his team following discussion with the EDS project line manager. The Commissioner notes in his judgement that "At all times Mr Roberts was deputy to the test manager."
It also appears that Mr Roberts' name appeared on the organization chart for the CSR project as "systems test operational manager". Mr Roberts told the Commissioner that EDS did not want to have consultants appearing on the organizational chart; they asked him to take up a permanent position, but he refused.
Mr Roberts, in his test management role, attended weekly meetings with the DWP to report on progress. Present at those meetings were the Minister, on occasions, a senior civil servant, the user's acceptance test manager for the DWP and two EDS managers (responsible for design and development). Each night at 9.00pm and every morning at 8.00am Mr Roberts reported to the EDS programme manager on the work done by the test team.
Mr Roberts regularly put in working hours well over the 37.5 hours per week. He accrued timesheets and submitted them in batches for authorization. He never sought prior approval from EDS for working hours in excess of 37.5 hours a week. Because of the tight time limits for the CSR project Mr Roberts understood that there was a general authorization from EDS to work excess hours without prior approval. The evidence from Mr Elder was that working excess hours required approval from the relevant EDS line manager. The Commissioner accepted that, while there was a strict legal obligation on Mr Roberts to obtain prior approval to working excess hours, it was not EDS's practice to require this of him. Had EDS wished to insist on the strict position, they could have done so but on giving reasonable notice to Mr Roberts.
There was also evidence that Mr Roberts did some work on the CSR project when at home. He used his own laptop and had "remote access" to the EDS local network. Because of firewalls surrounding the CSR project information, Mr Roberts' remote access was limited. Mr Roberts understood that only he of all those involved in the CSR project had remote access from home.
With regard to substitution it appears that at no time did FOL seek approval from either Elan or EDS to provide a substitute for Mr Roberts.
Judgement
In his judgement His Honour Mr Oliver noted that he had to identify "the arrangements involving an intermediary" (i.e. FOL) under which the services are performed. He then had to address the question whether, had those arrangements taken the form of a contract between Mr Roberts and EDS, Mr Roberts would be regarded as employed in the relevant sense.
The Commissioner's first conclusion was that throughout the periods covered by the disputed decision, EDS obtained the personal professional services of Mr Roberts. He also notes that:
"Moreover neither FOL nor Mr Roberts had any right to substitute someone to take his place. All Mr Roberts or FOL could do was to offer a substitute, but EDS was not obliged to accept.
While the Commissioner accepts that Mr Roberts' contribution to the CSR project was at a high technical level and of great importance to its success he notes that "the work was carried out at Longbenton and Washington because that was where EDS required it to be performed; a small amount of work may have been carried out at Mr Roberts' home through remote access. Mr Roberts had a large measure of control over how he conducted the testing procedure; but there was a test manager with overall direction and with responsibility for testing procedures. And work was allocated to Mr Roberts and his team following discussion with the EDS line manager."
He also notes that:
"in law, though not actually in practice, the purchase order required Mr Roberts to carry out work in accordance with instructions. The FOL/Elan agreement specified 37.5 hours each week as the standard hours and in law, though again not in practice, Mr Roberts required permission from EDS before working more hours in a week. Also relevant is the fact that Mr Roberts was required, under the FOL/Elan agreement, to adhere to EDS's rules and regulations."
With regard to payment under the contract the Commissioner notes that:
" Entitlement to payment for Mr Roberts' services was comprehensively covered by the FOL/Elan agreement. There was a fixed entitlement to an hourly rate for 37.5 hours a week: and payment for excess hours under the terms of the agreement, which were never changed despite the fact that Mr Roberts habitually worked excess hours without approval, depended on the prior approval of EDS."
On the issues of investment and risk the Commissioner noted that:
"Save for his laptop (which most individuals with qualifications similar to those of Mr Roberts possess) Mr Roberts provided no capital equipment for the work that EDS required him to perform. Mr Roberts referred to PI indemnity cover being held by FOL. I had no further details of this."
It is apparent that the Commissioner was especially influenced by the pivotal role that Mr Roberts played in EDS's taskforce working on the CSR project. He notes that "He was….accountable to a line manager. He was directly involved in recruiting and managing the members of his team."
The Commissioner noted the arguments of David Allen, on Mr Roberts' behalf, that there was no control in an employer/employee sense by EDS of Mr Roberts' activities. Allen argued that Mr Roberts had been engaged by EDS at the time when it had the challenge of putting in place a system in a much shorter period than would normally have been required and that Mr Roberts was given a wide remit and not tied down by instructions or rules. He was the expert and he wrote the templates.
However the Commissioner dismissed this view as follows:
"While I fully recognize the exceptional experience and essential functions performed by Mr Roberts in the CSR project, I also have to recognize that there were constraints, legal and practical, governing Mr Roberts' work at the sites. I have identified certain arrangements in the previous paragraphs which show that, in essence, EDS controlled Mr Roberts in his work. EDS was able, on a continuing basis, to direct when and where the work was to be done; and, while I accept that Mr Roberts' work involved an especially high level of skill and independence of judgment, EDS were through their organizational structure able to control how the work was to be done. Mr Roberts' position was deputy to the test manager; he continued in this position full-time for nearly three years. Throughout that period the position was integrated into EDS's overall structure set up to carry out the project. Looking at the matter with the question of whether Mr Roberts was subject to EDS's control to a sufficient degree to make EDS Mr Roberts' "master", I have to conclude that, had there been a contract between EDS and Mr Roberts, Mr Roberts would have been employed rather than in business on his own account."
Mr Allen also tried to argue that the actual obligations between EDS and Mr Roberts were so limited as to fall short of the "irreducible minimum of obligation on each side" required to create a contract of service.
On this issue the Commissioner noted that:
"Here it will be recalled that the services of Mr Roberts were engaged by EDS through FOL as intermediary and Elan as agent for a three month period which, in pursuance of the purchase order mechanism in the Elan/EDS agreement, were extended to cover the 153 weeks to the end of March 2002. The arrangement could be terminated by EDS by allowing the period covered by the purchase order in question to run its course without being renewed or on giving four weeks' notice. Until termination by EDS therefore there was an obligation on EDS to provide paid work at a place of work and a corresponding obligation to EDS for the provision of Mr Roberts' services coupled with Mr Roberts' obligation to conform with EDS's rules and working practices including the requirement to submit timesheets. It seems to me on that basis that the mutual obligations that actually existed between Mr Roberts and EDS were well above the irreducible minimum. Had there been a contract directly between EDS and Mr Roberts its mutual obligations would have been such as to establish an employer/employee relationship."
The Commissioner was also clearly of the opinion that Roberts was part and parcel of the organization. He concluded that:
" In the particular circumstances of the present arrangements Mr Roberts was well integrated into EDS's structure assembled to carry through the CSR project. He had a manager to whom he was accountable. Mr Roberts in turn worked as part of a team managing other people. He was involved in discussions as to work allocation with EDS's project line manager. He was expected to be available to advise and assist other members of the team. He attended meetings with interested parties alongside other EDS managers. Although Mr Roberts' role in the organization will not necessarily be determinative, it is clear that in the present circumstances he was an integral part of the EDS organization dedicated to the CSR project. This feature is in line with the conclusions I have reached based on the control over Mr Roberts' work and the presence of mutual obligations of an employer/employee nature existing between EDS and Mr Roberts."
Hence the Commissioner concluded that the Revenue was correct in deciding that Mr Roberts was a disguised employee in the context of IR35.
Conclusions
From the information provided it appears that the right of substitution in the agency contract was defective as it seems to have allowed EDS an absolute veto over any substitution. Hence there was a requirement for personal service. Once that is established the issue of control becomes critical.
As was the position in the recent Usetech case it appears from the information available that the client exercised a fair degree of control over Roberts.
Finally, it is also unfortunate that Roberts appears to have been sucked into a position where he seems to have become integrated into the client's management processes, with management-style titles and an active role in managing the team. Hence the issue of being part and parcel of the client's management seems to have played an important part in the final conclusion.
This is quite unusual in this day and age. As Anne Redston notes in her comprehensive work "IR35 Personal Service Companies", being part and parcel of the organisation is only a minor status test, such that even the Revenue accept in their manuals that "little reliance should be placed on it".
As has always been the case Special Commissioner decisions depend very much on the individual circumstances of each freelancer and their contract. The judgement seems to suggest that relatively few arguments were put forward to support Mr Roberts' case especially in the face of Mr Elder's evidence.
Once again this case emphasises that the best results are usually obtained without going to the Commissioners and once cases reach that stage the outcome is far from certain.