IR35 status cases the Revenue left out

The Inland Revenue have just added the missing section of their Employment Status Manuals to their website - section 7000 on Case Law. Perhaps a little surprising is how few cases are featured. The section contains just 25 cases which compares, for example, with the 100+ cases referred to by Anne Redston in her very comprehensive treatise 'IR35: Personal Service Companies.'

It will take some time to analyse the Revenue's guidance to see whether their interpretation of such key cases as Express and Echo Publications, Hall & Lorimer, Market Investigations, Kelly & Trusthouse Forte and Ready Mix Concrete (South East) Limited is consistent with the judgements and whether they have modified any of their previous comments in the light of Mr Justice Burton's comments in the PCG judicial review.

However, it is interesting to look at some of the key cases that have not made it into their list at all. Three in particular spring to mind:

· McMenamin v Diggles (1991 64 TC 286)

· Specialeyes (Optical Services) Limited, (1991 unreported - see Taxation 4 July 1991), and

· Winter v Westward Television Limited (EAT/589/77)

McMenamin v Diggles deals with several key status issues including substitution, financial risk and employing staff. Mr Diggles was a barrister's clerk who changed his arrangements within the chambers so as to become self-employed rather than continue as an employee. The Revenue challenged this but the Courts found in Diggles' favour.

A key clause in the contract required:

'The provision of a full time Head Clerk of not less than 10 years experience being either Mr Diggles or some other Clerk with that qualification.'

This clause was held to be valid despite the fact that Diggles had to admit that he did not know anyone who had the necessary qualifications to be his substitute. His case for self-employment was also strengthened by the fact that at any moment in time he might be owed up to £15,000 by the members of chambers and he also had to provide a junior clerk and other ancillary staff at his own expense. In addition, Diggles had considerable discretion as to how he provided the clerking services and no fixed hours - further pointers toward self-employment.

The Specialeyes case deals with the Revenue's current bete noir - mutuality of obligation. Specialeyes engaged locum opticians to carry out eye-sight tests. In addition to the locums the company also employed its own opticians. The Revenue challenged the company's claims that the locums were self-employed. They cited the fact that Specialeyes provided all the major items of equipment that the locums used and that the locums were essential to the running of the business.

However, Specialeyes were not obliged to offer any of the locums work and the locums were free to refuse an engagement without penalty - hence there was no mutuality of obligation. In addition the locums provided their own professional indemnity insurance and did not receive the sick leave and holiday pay that the employed opticians received. Hence the Special Commissioners found that the locums were engaged in a series of separate contracts for services and were, therefore, self-employed.

I am grateful to Anne Redston of Ernst & Young for drawing my attention to the third case, Winter v Westward Television. This was a 1978 decision by an Employment Appeal Tribunal. Between September 1976 and March 1977 Winter provided services to Westward via Samian Galleries Limited, a company controlled by Mr and Mrs Winters. The contract named Mr Winter as providing exclusive services to Westward and required Winter to act as drama adviser under the direction of Westward TV's production controller. Included in the contract was a clause requiring Winter to abide by the rules and regulations in force during the period as applicable to Westward TV's staff.

The Industrial Tribunal found that the contract was not a sham and was genuinely entered into by Westward TV and Samain Galleries Limited to achieve the object which those who put it forward had in mind. The Tribunal found that Winter was not an employee of Westward and had not been unfairly dismissed at the end of the contract. Winter had appealed and his Counsel (Alexander Irvine QC) argued that Samain Galleries Limited was really Winter's alter ego. He said that the Tribunal should have looked at the substance of the matter which was that the aim of the contract was to provide the service of Mr Winter and that using the service company was merely the way it was chosen to be done. He argued that Westward knew all along that Samian Galleries did not control Mr Winter and that Westward did. Hence, had the service company not been involved, then Mr Winter would have been an employee of Westward TV.

In rejecting the appeal the EAT noted that:

"It seems to us that it would be quite impossible to infer from the circumstances some relationship of employer and employee for a number or reasons, the principle one being that it is never right to infer a legal relationship when it is inconsistent with what the parties themselves have expressly agreed."

Then, in a section which is highly relevant to the issue of IR35, the EAT went on to comment on the fact that the Employment Tribunal had considered in 'a hypothetical manner' what the position would have been if, contrary to the case, Mr Winter had been in a contractual relationship with Westward TV Limited and if, as it were, it had been right to substitute him for Samian Galleries Limited. This is the exact situation that IR35 creates.

However, the EAT (The Hon. Mr Justice Phillips, Mrs D Swing and Mrs SC Marley JP) concluded:

"We do not propose to follow that path; indeed, it is an almost impossible path to tread because it involves making a hypothesis which is an invalid one to make, for this reason: were one to assume that Mr Winter had entered into a contractual relationship with Westward TV Limited instead of Samain Galleries Limited, the terms of the contract they would have entered into would, in certain important respects, have been different from the terms of the contract entered into by Samain Galleries Limited."

This strikes at the heart of IR35 and the issue of the hypothetical contract between the contractor and the end-client. Mr Justice Burton, in the PCG judicial review, also discussed the issue of this hypothetical contract, where he said:

"It appears to me clear that the Revenue must bear in mind that under IR35 they are not considering an actual contract between the service company and the client, but imagining or constructing a notional contract which does not in fact exist."

It is perhaps not surprising that the Revenue have not included any of the above cases in their case law for the Employment Status Manual as none of the cases helps their cause in vital areas such as substitution, mutuality of obligation and the vexed issue of constructing a hypothetical contract.

-- KevinM