Tilbury IR35 hearing: day one at the Special Commissioners
Today, 14 October, in London, another freelancer took his IR35 case before the Special Commissioners and came face to face with Death! In this case it was not that the Revenue were seeking the ultimate penalty for tax avoidance, just that their case was being presented by Mr Peter Death (pronounced 'deeth')('PD').
The case in question is Tilbury Consulting Limited ('TCL') and Margaret Gittins (HM Inspector of Taxes). The case is an appeal against a Revenue finding that TCL would be a disguised employee of its end client Ford Motors.
The director of TCL Mr Roger Tilbury ('RT') was present to give evidence as were witnesses from the end client Ford Motors – who the Revenue claimed were his disguised employers – and from Compuware through whom TCL contracted to supply services to Ford. TCL was represented by David Smith (DS) of Accountax. The case is being heard by Special Commissioner His Honour Stephen Oliver QC ('HHSC').
It is an especially interesting case for freelancers involving as it does issues such as working at the same client for 9 years, substitution clauses, control and who is the client?
Background
There had already been a preliminary hearing in this case in July when Special Commissioner Dr Nuala Brice granted the Revenue's request to issue a witness summons to the Ford manager Ian Baker ('IB') responsible for supervising TCL's work at Ford. See the separate UKTECH report on this hearing here:
preliminary hearing
That earlier hearing gave the Revenue the right to call IB as a witness – despite his already having given two written statements to the Revenue. However we learned this morning that he had not been called. Instead the Revenue were calling Mr Jim O'Neil who was IB's superior at Ford. In addition they were also calling Christine Ansell, a Recruitment manager at Compuware.
However the case opened with DS asking RT to expand on his own witness statement.
We learned that RT had been contracting at Ford since 1994 contracting via various agencies and software houses, as an employee of his own company TCL. Due to his particular experience and expertise he had been able to secure higher than normal rates which meant it made commercial sense to remain contracting at Ford during this period. HHSC asked him to explain exactly what he did and RT explained that he was a software developer developing software and related documentation in the specialist area of computer aided software engineering.
For the contract in dispute he started in August 2000 and continued, with one extension, until 31 January 2002. He was involved in what Ford called the Application Management Centre (AMC) where he worked on two specific projects in the area of forecasting volume mix and rates for car sales projections.
During earlier periods DS made the point that TCL had suffered delays in receiving payments from agencies and that at one stage TCL had contracted via an agency, Computer People, to supply services to Sterling Software who were working at the AMC. During this phase he had negotiated CP out of the contract by persuading Sterling that they could cut out the agency and split the £110 a day agency fee with the client and TCL. All good evidence of running a real business.
Eventually Ford subcontracted the running of the AMC to Compuware and TCL's contract was taken over by Compuware. DS made the point that at no time had Ford ever interviewed or in any other way 'selected' RT or TCL. For the period in question Compuware were acting as managers of the AMC.
As we heard later from JN (for Ford) and CA (for Compuware) Compuware managed the software programme (maintaining and enhancing Ford's internal software) which covered manufacturing, sales, finance, accounting, purchasing, plant floor and product development. The structure was complicated but essentially Compuware had a director on site responsible for all the services they provided to Ford at the AMC. Each business application area had a Compuware application portfolio manager who oversaw teams of software developers each with a Compuware application manager. Ford in turn had one of their managers acting as an interface between the application teams and the business users, and for 12 of the 18 months covered by the contract in question JN was the Ford manager with overall charge of the Ford application managers.
Unusually in this case the application manager for the team that TCL was involved in was a Ford manager IB and he actually reported up to a Compuware manager.
We heard from RT how at the start of the new relationship with Compuware he had specifically negotiated a substitution clause with a senior Compuware manager and the Compuware legal department. This had delayed signing the contract for a month and meant that, having started on 1 August 2000, he did not get his first payment under the contract until the end of October.
Substitution
A major issue in this case is the right of substitution that TCL had in its contract with Compuware. This basically allowed TCL to substitute anyone with equivalent expertise and experience but also provided a 30 day trial period during which the substitute could be rejected if they proved unsuitable. There was evidence in the form of a letter from IB that confirmed that as far as Ford were concerned TCL clearly had a right of substitution.
PD for the Revenue tried to make much of the fact that no substitution had ever taken place. He also tried to argue that it was clear that Ford wanted RT for his specific expertise and did not want anyone else.
When JN was called as a witness he was asked why he was representing Ford rather than IB? He explained that as overall the senior Ford IT manager responsible for the AMC he was better placed than IB to know the full picture of the relationships and contracts between Ford, Compuware and TCL.
When asked whether he agreed with IB's assessment that TCL had a right of substitution he disagreed on the grounds that IB was not in a position to know as this was an issue between Compuware and TCL not Ford. On cross examination from DS he confirmed however that as Compuware were responsible for the management of the AMC Ford had no interest in who worked on the project only that it was effectively staffed and progressed in accordance with the contract with Compuware.
When CA (another Revenue witness) was examined on this issue she stated that about 60 contractors had a similar clause and that in her experience in three years no contractor had actually used a substitute. RT confirmed that he had not had to use a substitute as the need had not arisen. However on cross questioning by DS CA had admitted that she had not known that TCL's substitution clause had been the subject of specific negotiation with a senior Compuware manager and their legal department.
In his legal arguments DS drew heavily on the LimeIT case where a substitution clause with a 10 day overlap period at LimeIT's expense was considered by the Special Commissioners to be a major factor pointing towards being outside IR35.
Control
This is another key issue. The Revenue have apparently accepted that TCL are an independent contractor and were not controlled as to the manner in which the work was done.
But PD in cross questioning RT clearly tried to make the point that RT/TCL were controlled by the team manager as to what their priorities were on the basis of the weekly team meetings they held and that TCL were reporting to IB. One issue that was explored in depth was whether TCL were required to work a standard week and get prior approval for any absences. The contract with Compuware required a standard 37.5 hour week. JN had explained that Ford would allow their own staff some flexibility to vary hours to suit travel and other needs and that any flexible arrangements that TCL might have followed would have been agreed in advance with IB.
When JN (a Revenue witness) was examined by PD he seemed to undermine some of RT's claims about how he was managed and treated at Ford. However when DS cross examined JN he tellingly made the point that JN had never even met RT until, a week ago, JN had had no involvement in any of the team meetings that RT attended and that IB who was apparently responsible for RT did not even work on the same office floor.
RT had made the point that he had considerable flexibility as to hours. He usually worked 4 longer days and left early on Fridays. He did not always balance a shorter week with additional hours the next week. He sometimes worked from home when he was in the early stages of a project where he could do the work on his lap top or was drafting documentation. However most of the time he worked on site as he had to have access to the Ford mainframe.
DS in his legal arguments argued strongly that for RT to be a disguised employee of Ford there had to be a degree of control as between a servant and a master (based on the Ready Mixed Concrete case). As DS noted Ford might have a right of general inspection of the work but this was no more than anyone would expect. Anyone using a self employed decorator would still exercise a right of inspection of the work! As the Revenue's own Employment Status manuals make clear what matters is the right of supervision, direction and control over the manner in which services are provided and Ford clearly did not have that right.
In fact it was clear that not only did Ford not have this degree of control in practice it was also illogical - as the management of the AMC was in Compuware's hands. In DS's view there would have been a better argument to say that RT was a disguised employee of Compuware but that was not what the Revenue was asserting and if they did it would have to be by way of a totally new case!
The client?
This argument seems to expose a major flaw in the Revenue's case. As the role of managing the AMC was explained I had spent most of the morning wondering why the Revenue were claiming Ford was the disguised employee? In the Synaptek case at the High Court in March 2003 Gordon Stutchbury had been found to be a disguised employee of EDS who were providing his services to the benefits agency. Here the Revenue's case seems to be seriously weakened by the fact that as confirmed by Ford's own manager JN the management of the AMC for the period in question was in the hands of Compuware.
This point alone may well undermine the Revenue's case. It may explain why PD's cross-examination of RT seemed to be very low key. It appears that the Revenue did not appreciate until very late in the day the full extent of Compuware's role at Ford.
The case closed at 4pm with DS still to complete his legal submissions and the Revenue still to start theirs. It is scheduled to continue on Thursday morning.
Conclusions
It is a feature of cases like this that you are often left convinced by the last arguments that you have heard! In this case apart from the basic witness statements and cross examinations we have only heard part of the legal arguments from DS on behalf of TCL. Certainly the arguments regarding substitution and control have been well made by DS. At this stage it seems hard to envisage how the Revenue will knock these down, especially as they seem to have dropped a major clanger in arguing for Ford as the employer and not Compuware.
Nevertheless they may well try and meet that point by arguing that Compuware, is in effect, the agent of Ford as far as managing the AMC is concerned and then try to establish that the right of substitution is fatally weakened by the 30 day trial period.
Certainly when the Revenue first got into this case they must have thought that with a contractor being at the same client for 9 years they had to be onto a winner. I suspect that they are now not so sure but we will have to wait and see.