Battersby case was like David and Goliath, says Redston

Anne Redston, tax expert and author of the book, 'IR35: Personal Service Companies', told delegates at an IR35 breakfast seminar in London she was saddened by the recent failure of contractor 'Eddie Battersby's' case before Special Commissioners.

She said: "It was like David and Goliath, but unfortunately, this story didn't end up the same way. That was to be expected since Mr Battersby chose to represent himself against the Revenue without legal assistance.

"When the judge asked Battersby why he believed he did not come under the IR35 rules, he replied simply: 'Because I am not trying to avoid tax.' The Revenue then proceeded to lay down 13 different pieces of case law to back their claims that he was, and he lost."

Ms Redston's seminar covered many of the issues surrounding IR35, including mutuality of obligation, substitution and employment status tests.

She expressed disbelief at some of the careless wording she had seen recently in contracts, two years after the introduction of IR35.

She said: "I have seen phrases like: "Contractor will faithfully serve..." which really doesn't help matters relating to 'control.' I advise contractors to look at the wording of these contracts a bit more carefully with regard to changes that can be made whilst making sure the contract still offers a fair reflection of what the contractor will do for the client."

She highlighted a case brought against the Revenue eight years ago by two actors, Alec McCowen and Sam West, who argued they were self-employed in front of Special Commissioners and won.

She said: "If you were to take an Equity contract and replace the word 'actors' with 'IT contractors' and the theatre they worked in with 'city bank', and sent it to the Revenue for clearance under IR35, then it would have failed. The actors proved their self-employment status successfully but it is likely to take a similar case involving IT contractors, because without it the Revenue just isn't prepared to agree that the positions are similar."

Ms Redston also warned there might be danger in the New Year for companies running programmes designed to escape IR35 and contractors who used them.

She said: "We will see Revenue Special Compliance Officers making examples of IR35 avoidance schemes as well as of those who use them. Also in the firing line could be umbrella companies as the Revenue can review many contractors at the same time."

Speaking about mutuality of obligation (MOO), Ms Redston said: "In the PCG's judicial review, the judge said the Revenue was wrong on this part. He said: 'It must be significant... to consider whether, looking at the actual relationship and a notional contract, between the client and the service contractor, any obligation would be owed by the client.' In other words, is there any obligation owed by the client to the contractor? In my view the Revenue has not dealt with this point sufficiently.

"As revised, the Revenue's Employment Status Manual states that the 'irreducible minimum is:

• That the engager must be obliged to pay a wage or other remuneration, and
  
• That the worker must be obliged to provide his or her own work or skill.' (ESM514)

"This however is not a definition of MOO. It takes no account of the obligation of the engager to provide work if available, and of the worker's obligation to do it. There are other comments in the case law which elaborate further on the meaning of MOO, but these are not included in the ESM."

Referring to the issue of the Revenue's employment status test, Ms Redston said the Revenue used 'knock-out' blows to apply the legislation, starting with 'substitution.'

She said: "Substitution is a magic wand and the Revenue does not like magic wands. The one good bit of the Revenue's IR35 manual is that even if a substitution clause does not allow the client to reject a worker because he or she is unsuitable, this right of rejection should be implied, and this does not invalidate the effectiveness of the clause."

On the subject of 'control' as to how something is done, she illustrated her point by saying that this is not necessarily decisive either way in the case of an expert. She said: "A local health authority would not tell a brain surgeon how they wanted a patient operated on, and so it goes for contractors who have been asked to work on a particular project using their expertise."

On the issue of equipment, Ms Redston said that using major equipment belonging to the contractor in the course of working on a project generally pointed towards self-employment. Having only minor equipment was 'not decisive.'

She illustrated how this could also work the other way by citing Hall v Lorimer (1993) in which Mr Lorimer, a vision mixer, was held to be self-employed despite the fact that all of the equipment he used belonged to his client.