Ansell Computer Services IR35 hearing over substitution
Special Commissioner Graham Aaronnson QC ('GA') added his name to the growing list of Special Commissioners who have struggled with the complexity of an IR35 case. Aaronnson, who admitted that his background was in corporate tax law rather than personal tax, observed several times during this latest hearing that IR35 was far from clear – describing the process of identifying the hypothetical contract under IR35 as "working in a sand storm or a fog"!
Interestingly, at the end of the hearing the Revenue's representative volunteered an admission that IR35 differed substantially from the original proposals, and had been introduced in some haste; and he appeared to concede that it was very difficult to apply in practice!
Ansell Computer Services
The case in question is that of Ansell Computer Services Limited ('ACSL') and its director Mike Ansell ('MA') who was appealing against a Revenue opinion that two of his contracts were caught by the IR35 National Insurance legislation.
This appeal came after MA had sent his contracts to the Revenue for their opinion on their status. PCG director Richard Robson, who was present at the hearing, confirmed to me that because MA had voluntarily submitted contracts to the Revenue he was not covered by the PCG's tax investigation cover.
Somewhat surprisingly, given the fact that he had ignored PCG advice not to submit contracts to the Revenue, they were supporting him from PCG funds.
Model contracts
However, the fact that both the contracts involved were based on the PCG's model contract might be a factor in this decision. PCG members might be concerned if a contractor working under this model contract was to be caught by IR35.
However, as the case unfolded it is clear that one of the key issues is whether this contract actually represented the reality of the arrangements between the contractor and the end client?
This hearing has stretched to two days. The first day was just before Easter when evidence was heard from MA and from representatives of the agency Centre Dynamics ('CG') and one of the two end clients, BAE. The other client was a subsidiary of Marconi that is no longer in existence. Following the evidence gathering session the hearing had a second day on 16 April when the Commissioner heard the legal arguments from both sides. ACSL was represented by Accountax's Dave Smith ('DS') while the Revenue was represented by Kevin Gleig ('KG').
Background
I was unable to attend the evidence gathering session so I have to rely upon the references to the facts that were made in the second day of the hearing. MA had contracted through his own company for at least 20 years. The contracts in dispute were contracts he had gained at Marconi, and then BAE, on two interrelated high security MOD projects. His Marconi contract had been for three months but came, I understand, after he had worked for several years on a variety of projects at Marconi. He then moved onto BAE where he had a six-month contract.
The agency CG was only involved because the end client did not deal direct with contractors.
Early in 2002 MA had sent both contracts to the Revenue for an opinion. As part of the process the Revenue had wanted to contact the agency and client but the contractor had resisted this. I gathered, as proceedings unfolded, that neither the Revenue nor MA had had access to the contracts between the agency and the end clients. However, there were purchase orders between the end client and the agency. While the agency contract with ACSL did not name MA personally these purchase orders usually referred to the supply of MA for a set period and for a set number of hours per day.
As is usual in these cases a few issues appear to be key. These are the basic key factors as originally set out in the Ready Mixed Concrete case from 1968 and cover personal service (or the right of substitution), mutuality of obligation and control.
Substitution
Both contracts were based on a PCG model contract and included a specific right of substitution. It appears that in the Marconi contract this right was less well phrased and only gave ACSL the right to propose a substitute. In the BAE contract it appears that the right was better worded and gave ACSL the right to send a substitute subject only to being suitably qualified and having the necessary security clearance.
Interestingly KG for the Revenue conceded that had the agency contract with the end clients reflected the contract between the agency and ACSL then we would not have been having this hearing at all. This at least indicates that if the model contracts reflect reality then they are effective in beating IR35.
However, this highlights one of the key issues behind this case. ACSL's contract with the agency included a clause that required the agency to ensure that the terms and conditions of this contract were mirrored in the agency client contracts. However, it appears the agency had not done this and ACSL had not checked to ensure that the client accepted key clauses such as the right of substitution.
Much of the debate in this case has therefore centred around whether the key terms in the agency/contractor contract were reflected in an agency/client contract that has not been made available to either party in this case, nor to the Commissioner? The Revenue have argued strongly that the purchase orders, which have been disclosed, make it clear that MA's personal service was required, while DS for ACSL has argued equally strongly that ACSL cannot be bound by a contract or purchase orders that they have not seen and were not a party to.
Also highly pertinent to the argument is evidence from the end client. I understand that a client representative gave evidence to the hearing and expressed some surprise that ACSL had a right of substitution. However, there has also been evidence, in the form of an email from a very senior manager at BAE that confirms that BAE would accept a substitute who was qualified and security cleared. Furthermore, he also confirmed that BAE had in the past accepted such a substitution – albeit in respect of another contractor, not ACSL.
Hence DS's case draws very heavily on his contention that this substitution clause and the client's evidence make it clear that ACSL was not required to provide the personal service of MA.
On the other hand the Revenue argues that, in the absence of the contract between the agency and the end client, the key documentary evidence as to the real nature of the relationship is the client's purchase orders that refer specifically to the supply of MA for a set number of hours. For the Revenue, KG also pointed to an unsigned contract between the end client and CG that included a requirement that any variation in the contract has to be agreed in writing. In his view this made it clear that the end client did not accept a right of substitution but might at best allow ACSL to propose a substitute that might or might not be accepted.
However the Commissioner, who throughout the day was at pains not to imply that he had any clearly formed conclusions on the case, did remark that he:
"did not get as much out of this as you (i.e. KG) would like me to. This is a very general boiler plate document and is not even between the right parties nor is it signed"
It is clear, however, that this is going to be a crucial issue; whether in the absence of clear evidence as to what the contract was between the client and the agency it is reasonable to assume that the agency contract with ACSL reflects reality. The fact that there is a statement from the client that they would accept a substitute and that they had done so in respect of another contractor must be a very strong factor in support of the ACSL case. DS also pointed out that in the LimeIT case, which the contractor won, the end client was also Marconi and the same form of purchase orders had also been used and these had also named the individual contractor.
Nevertheless, as the Revenue argued, the failure of the agency to obtain a contract with the end client that mirrored the key terms of the contract with ACSL suggests that the end client was not prepared to accept some of those terms.
Mutuality of obligation
DS noted that ACSL had been used on a number of projects over several years and the client's evidence was that it used contractors as a form of back stop. DS argued that neither Marconi nor BAE had any obligation to offer ACSL any work and there was no obligation on ACSL to accept. In DS's view, which naturally the Revenue did not share, the purchase order merely set an upper limit on the value of the services to be purchased. In DS's view this contrasted with the Synaptek case, where purchase orders also featured, but where they specified a minimum number of hours to be purchased by EDS and supplied by Synaptek.
DS argued that merely turning up and doing work for payment is not enough to create the necessary MOO. The Commissioner seems to have regarded this area as significant. He questioned DS on whether, once the contract was entered into, ACSL could have turned up on day one of a three month contract only to be told that the client had cancelled the project?
In DS's view this was exactly the case and he gave as evidence the client's confirmation that if there was no work to offer they could have terminated the contract at a day's notice. This issue was later taken up by KG who tried to argue that in the context of a three month contract getting one day's notice was not unreasonable.
GA also questioned whether there were any obligations for ACSL to provide services for the three or six month period? Again DS argued that the use of these terms was merely a human resources management device – to set an agreed upper limit – but did not establish a contractual commitment for ACSL.
In support of his view DS cited a recent EAT decision in the case of Dower and Property Care which concluded that MOO is more than a simple obligation to pay for work done. It also involved an obligation to provide work and to carry it out.
For the Revenue KG argued that the purchase order clearly showed that the engagement was for a specific period and was for the services of MA. He noted that the timesheet showed that MA had worked on the contracts up until 5pm on the last day of the contract. This he argued was a clear indication that ACSL had been engaged to MA's expertise for a period of time and the fact was that he was not engaged to complete a project as the project was not completed by the time his six month period ended.
In KG's view Ansell was not free to attend or not as he saw fit. In return for an hourly wage MA agreed to carry out work for the end clients and had done so for nearly 10 years. There was a mutual commitment to maintain a relationship over an extended period of time. At no time has MA ever asked the agency to find other work and ACSL had not had any other clients in this period.
Control
On the issue of control the Commissioner had heard evidence that MA had a degree of flexibility as to when he did the work and he had clearly taken time off on occasion to play golf.
DS again argued that the relationship between MA and the end clients lacked the necessary degree of control that was required to establish a master servant relationship. When DS commented that the Revenue would argue that, as a skilled expert, MA would no more be subject to close control than was a brain surgeon, GA enlivened proceedings by commenting that his son was a brain surgeon!
GA went on to add that he was quite clear on the different levels of control exercised by a hospital over its employed surgeons – telling them when to carry out operations or when to provide training courses etc – and the position of a self employed person. As GA pointed out GA had been an employee and was now self employed and he quite understood the difference! Helpfully GA concluded that:
"based on the evidence it does not seem that Ansell was controlled like an employee" however he then added that " this is not a major factor but if it helps anyone it helps Ansell."
I think this should be interpreted as the Commissioner indicating that lack of close control over an expert does not necessarily mean that the expert is self-employed. This was certainly the point made by KG, who argued strongly that the degree of flexibility that MA appeared to have was no different to that which any relatively senior technical expert employed by BAE or Marconi was allowed.
In his view the treatment of MA was consistent with anyone of some seniority employed in a flexitime environment. In KG's view the end clients still had the power to decide what, when and where the work was done and with what equipment.
On this latter point it had been accepted by DS that MA used equipment provided by the client but had cited the Hall v Lorimer vision mixer case as supporting the position that not providing your own equipment was not necessarily relevant. In this case there were clear practical reasons why MA had to use the client's equipment and why MA had to work as part of a team.
An interesting little debate ensued when KG argued that the fact that MA used his company's equipment at home for company administration, training and research was of no significance. He had not used it for any of the contracted work. However the Commissioner GA appeared not to accept that this had no significance. He argued:
" But if I used a home computer to research Court decisions and update myself aren't these factors that can be taken into account"
However, KG dealt with this point quite effectively by noting that as a Revenue employee he used a home computer to do just that so the issue was irrelevant. He also noted that there was nothing to stop Ansell being an employee by day and self employed by night.
Part and Parcel and Risk
KG also argued that MA was part and parcel of the organisation. MA was listed in the internal directories as a 'software engineer'. The fact that he had a pass in a different colour was irrelevant. Any visitor to the client's offices would have seen MA working alongside the client's employees using client equipment and working to all intents in the same way as an employee. He turned up every day working full time for a single paymaster. He wasn't engaged to complete a specific task or project but to work for a period of time.
DS had conceded that MA's in business credentials were not strong. He had not had any work in parallel and KG emphasised this by adding that MA could not profit by completing a task early. If he finished it early he earned less.
Winding up his arguments KG emphasised that there was MOO, MA was part and parcel of the organisation, the degree of control was no different to any senior technical expert and the purchase orders made it clear that his personal service was required. Hence in his view there was nothing in the evidence that was incompatible with the Revenue's contention that the hypothetical contract between MA and the end clients was a contract of service.
What reality and what outcome?
Once again this case illustrates how difficult these cases are to call. I suspect that most independent observers would have been convinced by DS's arguments – that is until they heard KG's arguments! The Commissioner was at pains to appear open-minded. At the end of each set of arguments he congratulated first DS and then KG for the clarity of their case and for making it much easier for GA to understand the issues.
One aspect where GA was not afraid to make his views clear was on the difficulty of applying IR35 and the problems of constructing this hypothetical contract. Apart from his 'working in a sandstorm' remark he also remarked that:
" IR35 is very difficult to apply" and " these are very difficult issues"
He also noted that he had been the first chairman of the Institute of Fiscal Studies tax law review committee eight years ago and that one of the first projects they had decided to address was the boundary between employment and self employment. The fact that eight years later they had still not reached a conclusion was testimony to the complexity of the issues!
Clearly reality is going to play a major part in the decision. But what reality?
Is it the reality of the agency contract with ACSL – the only contract that MA saw and the only one that the Commissioner has had access to?
Or is it the reality of the purchase orders and the fact that MA turned up for work every day to work alongside employees in a manner that was, arguably, very little different from any other senior employee?
In dealing with these issues GA also made it clear that he was minded to rely on the overall picture rather than any one test. He remarked at one stage that:
"I would be very surprised if there are any factors that are totally conclusive one way or another. I will try to apply principals but on the basis of what seems appropriate in the circumstances of this case"
The right of substitution seems to be the most important issue. MA clearly believed that he had the right based on his contract with the agency. It also appears that the end client was prepared to accept substitution provided that the job got done. However, while the Tanton judgement makes the point that lack of an obligation for personal service is inconsistent with employment, GA may conclude that this case has factors that allow him to draw a distinction.
Tanton contracted direct with Express and Echo and had exercised his right. In this case we have some uncertainty about what right existed between the agency and the end client. It is not clear as to whether the 'reality' of the situation between ACSL and the end client was that ACSL could substitute anyone with suitable experience and the necessary security clearance; or that ACSL could propose a suitable substitute but that the end client could decide whether or not to accept it.
If GA is focussing on the wider picture he may conclude that the latter is the more realistic scenario.
Substitution will be the key issue. Control also looks to be finely balanced.
The Revenue's arguments that the degree of control was consistent with that of any senior technical expert will, I think, carry some weight. I also suspect that on the issue of MOO the Commissioner may be swayed by the fact that the reality was that MA appears to have entered into a relationship with the end client that was, in practice, long term. GA may not be convinced that the claim that if the client could, in theory, terminate the relationship at a day's notice, then this should outweigh the evidence that it did not and that MA worked until the very end of each contract.
GA debated with DS whether his view on one contract could or should be influenced by his view on the other. This is pertinent because DS conceded himself that the ROS in the Marconi contract was weaker than in the BAE contract. DS had to agree that ultimately the Commissioner was hearing two appeals – one for each contract – and there could be different outcomes on each. As GA observed that might be a desirable outcome as it would leave both parties equally unhappy!
However, he concluded the debate by saying that it was unlikely that he would reach different conclusions on each contract.
Conclusions
I am not a betting man and I would not want to call this case either way. However, it is clear to me that the case could be an important one and it is one that seems to have more downside than upside. The agency contract with ACSL is clearly a 'pass' contract – the Revenue admitted as much. There is evidence to support the view that the right of substitution is not a sham and the client would, in theory, accept a substitute.
A win would not, therefore, be a surprise and it would confirm what is largely the current status quo. Certainly I think it is quite probable that experts like Qdos or Bauer and Cottrell and many others who prefer to consider the Commissioners as a last resort would usually expect to be able to convince the Revenue to drop a case like this before going as far as the Commissioners based on this evidence.
But a loss in these circumstances could be something of a blow. Although, as is so often the case, the circumstances are sufficiently unique to leave scope for others to work around any precedent this sets it would, nevertheless, provide the Revenue with some encouragement to press more strongly in future.
Hence, even in the face of a sound ROS and some evidence from the client that a ROS would be accepted, the Revenue may regard a win in this case as affording more scope to challenge such situations.
I hope I am proved wrong. We will have to wait for the Commissioner to complete his review of the hearing transcription and the detailed legal arguments. Based on his conduct at the hearing I am confident that GA does not have any agenda of his own and will approach the evidence and legal precedents as objectively as he can when reaching his decision.
Watch this space.
Kevin Miller, MA FCA
Kevin Miller Consulting Limited