Revenue wins first IR35 case before Special Commissioners

An IT contractor has lost his appeal against a Revenue decision that his contract came under IR35. Battersby (anonymised) v Campbell (HM Inspector of Taxes) was the first IR35 case to ever go before the Special Commissioners.

The contractor, Mr Battersby, worked through his own limited company for a bank for almost seven years. During this time he contracted with an agency and also direct with the bank. In the six month engagement in question he was contracted via an agency. In April 2001 he took up a permanent position with the bank. The Revenue claimed that there were outstanding payments of National Insurance Contributions to be made.

The judgment stated IR35 applied to Mr. Battersby because he was required to:

• Provide personal service (he had no right of substitution);
  
• He was required to work a given number of hours a day;
  
• Although he was not told how to do his work he was subject to the
  client's control;
  
• He did not hire his own employees;
  
• He did not provide any equipment;
  
• He was not subject to any financial risk or opportunity to profit or
  loss (he was paid an hourly rate);
  
• He was part and parcel of the client's organisation (he was a team
  leader who was managed, and who himself managed contractors and employees);
  
• He provided services exclusively for the bank and the length of
  engagement had an element of permanency (7 years).

These facts outweighed those in favour of IR35 not applying, including:

• The intention not to be an employee;
  
• The lack of sick pay or holiday pay;
  
• The lack of job security and the custom in the industry for contractors
  to be treated as self-employed.

Mr Battersby chose to represent himself in court and the published information suggests he had no professional advice at any stage. In his submissions Mr Battersby did not support his arguments with case law nor was he in a position to refute the case law cited by the Revenue.

According to the Professional Contractors Group: "Mr Battersby was ill-advised to represent himself in front of the Special Commissioner. As a contractor who had been at the client for seven years, both via agencies and direct, on contracts that contained a number of employment-like characteristics, his was a case which required skilled professional advice and knowledge of the relevant case law.

"Superficially, his case seems weak and in the absence of skilled advocacy on his behalf the Revenue appears to have had a very easy ride with many of the key issues never being explored in any depth. For example no mention was made of whether there was any mutuality of obligation (MOO) between the client and Mr Battersby.

"It is by no means a forgone conclusion that mutuality (the obligation of the employer to provide work and payment and of the worker to carry out the work offered) exists even in a relationship that persists for 7 years.

"The Commissioner seems to have accepted that Battersby was managed by the client's personnel manager without having explored the nature of that management. In the absence of contrary case law indicators she also seems to have accepted that payment by the hour was an indicator of employment. However, case law shows that this at best a neutral factor with many self employed people being paid on an hourly basis.

"It is also surprising that the Commissioner's decision appears to dismiss a right of substitution on the irrelevant grounds that it had not been exercised. It is also not clear why the Revenue only sought for IR35 to apply from 31 May 2000 when the legislation came into effect on 6 April 2000. It may be due to the fact that at that time Battersby was working under a direct contract to the client. The agency arrangement only came into effect on 31 May 2001. Unfortunately there is no indication of what factors lead the Revenue to ignore the period from 6 April to 30 May."

Kevin Miller, PCG Director, added: "Overall this seems to have been a cheap victory for the Revenue. It illustrates the importance of having good advice and support. We very much doubt that a PCG member would have been 'turned over' so easily. Not only do PCG members qualify for professional advice and support for appeals to Commissioners but just by discussion within our forums Mr Battersby would have been alerted to many key arguments and supporting material. Compared to the cost of the extra tax and NIC an investment in PCG membership would be good value at twice the price!"

Adrian Marlowe, Managing Director of Lawspeed, said: "It is vitally important to have proper representation when facing the Revenue, we have successfully challenged the Revenue in many IR35 appeals, before getting to the Commissioners, and our results are always based on detailed analysis of the legislation and applying the relevant case law." He went on to state that, "Contractors with a genuine business operation who have sought advice and negotiated effective contracts should not be too worried by this result."

Decisions by the Special Commissioners do not set legally binding precedent but they may be of influence in other hearings before the Commissioners.

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Richard Powell, UKTECH