What the Tilbury IR35 victory really means

As we announced last night Roger Tilbury and Tilbury Consulting Limited have won their case against Margaret Gittins (Her Majesty's Inspector of Taxes), on which the Revenue had argued that Tilbury was a disguised employee of his end client Ford Motor Company.

The question arises as to whether the Tilbury Case provides hope for everyone or whether it is just a one-off?

Some commentators are now claiming that this decision marks the beginning of the end for IR35. While I very much wish that were the case I think that this may be taking a little too upbeat view of the case.

I have not yet been able to see a copy of the 9-page judgement. However, from information published by Dave Smith of Accountax, who handled the case for Tilbury, it appears that most of the judgement was taken up with the facts and that only half a page covered the reasons for the decision. Furthermore there is apparently little real analysis of the factors leading to the decision and no references to past case law.

It appears that the main issues of fact cited in the judgement were:

· That the supposed end client, Ford, had made it quite clear at the hearing that they were not concerned with who provided the service – this seems to be a strong positive point towards self employment.

· Much of the work was done at Ford's premises but some was done from Tilbury Consulting Limited's premises - this is probably a slightly negative point overall.

· Tilbury Consulting Limited had a right of substitution in its contract with the agent, Compuware and there was a similar right in the contract between Compuware and Ford. These rights were qualified and Tilbury had never exercised its right - this appears to have been one of the main pointers towards self employment

· Tilbury Consulting Limited was paid by the hour - which seems to have been entirely neutral as a pointer

· That the direct manager from Ford did not in practice tell Mr Tilbury how to do the work - this lack of control seems to have been another major pointer towards self employment

Other facts also noted in the judgement were that Roger Tilbury had a pass that was a different colour to a Ford employee pass and that it did not give him access to the gym; and that Ford's medical centre was open to everyone on site regardless of whether they were contractors or employees and hence the fact that Mr Tilbury would have received medical treatment from the Ford medical team was totally neutral as to his status.

In their case the Revenue had argued strongly that, as the right had never been exercised, either by Tilbury (or by any of the other 60 or so contractors working at Ford through Compuware), it was not really an effective right of substitution and that clearly Ford had engaged Tilbury because they wanted him for his accumulated experience at Ford and no other.

In this they appeared to be trying to use the Synaptek case, which was heard at the High Court early in 2003, as precedent for ignoring a right of substitution, which had never been exercised.

However, the fact that the Special Commissioner appears to have regarded this right of substitution (ROS) as a major factor in reaching his conclusion, seems to restore the role of a ROS in status decisions to where most experts consider it should always have been.

Another key aspect of the Revenue's case was their interpretation of how the hypothetical contract between the worker and the end client should be constructed. They had appeared to argue on the basis that you had to assume that the end client were contracting directly with the worker and to then make assumptions as to what the terms of that contract would have been.

Hence they tried to argue that had Ford contracted directly with Roger Tilbury then they would have done so on the basis that they wanted him and no other.

Dave Smith had argued against this at the Hearing. His view was that the legislation merely required you to take the facts of the relationship (contracts and actual practices) and then determine what the relationship between the worker and the end client would be if the intermediary were removed from the scene.

It was clear at the hearing that the Special Commissioner, Stephen Oliver QC, was bridling at the Revenue's approach – which in effect appeared to be to assume that if the worker were to be taken on directly by the client then it would be as an employee!

This judgement should prove very useful in establishing that the hypothetical contract must be based on the facts of the existing contracts and the actual working relationships, not on any assumptions as to what might have happened had the contract been direct between the worker and the end client.

Another key factor in the judgement appears to be the lack of any practical control being exercised by Ford over Roger Tilbury. This is perhaps the area where the facts of this case may differ from that of many other freelancers.

It was clear that the Revenue had totally failed to grasp the role of Compuware in the management of the Ford IT facility, where Tilbury Consulting was providing its services. Had they made more effort to understand Compuware's role then it is clear that they would have claimed Compuware as the client and not Ford. That would have made the facts closer to those in the Synaptek case, where the freelancer was found to be a disguised employee of EDS, who were providing his services to the Benefits Agency.

It was clear from the facts that Ford had sub-contracted the management of their entire IT facility to Compuware. Hence it was not Ford's role to manage the workers within that facility and any Revenue claims that the worker was subject to employee like levels of control by Ford were on very shaky ground!

The impact on IR35?

So is this case likely to prove a watershed in the battle against IR35?

It is clearly a very satisfactory result for all concerned. It will make it much harder for the Revenue to argue that the length of time spent at a client is a strong pointer towards tax status. Tilbury worked at Ford for about 9 years on a variety of projects but this seems not to have had a material impact on the judgement.

This case confirms that a right of substitution is an important factor even when the client and agent have 30 days in which to remove a substitute who proves to be unsatisfactory and, more importantly, even if the right has never been used over a long period of time.

However we need to bear in mind that the client confirmed in court that it was of no relevance to them who did the work provided it was done on time and to the required standard. This attitude reflected in large part the fact that, for the period this contract covered, all management of the IT facility was sub contracted to Compuware.

Had Compuware been claimed as the client would they have been as willing to state that they did not care who Tilbury Consulting sent to do the work?

The case also makes it clear that the hypothetical contract must be constructed from the application of the terms of the actual contracts and actual working practices not on any broader assumption. In addition it seems clear that in reaching his conclusion the Special Commissioner has focussed more on the differences that point away from employee status than on the similarities. For example his noting of the different colour security pass while apparently not regarding as significant the fact that Tilbury had the same access rights and password controls to the Ford IT system as would a Ford employee.

By focussing on substitution and control the Special Commissioner also appears to be reconfirming that if key issues are incompatible with employment status then other factors are largely irrelevant.

But as with all case law the decision is also fact specific. There will remain many cases where facts differ significantly so as to make a material difference to the final decision. This is especially the case as regards the fairly unique role of Compuware in managing the IT facility on behalf of Ford. We should also bear in mind that Synaptek remains the only High Court IR35 case and this is only a Special Commissioners decision. I doubt that the Revenue will appeal this case in view of their fundamental error in arguing for Ford and not Compuware as the client but I also doubt that the Revenue are going to back off from IR35 cases just yet.

So, while all freelancers should celebrate this decision I think we are still some way away from saying that IR35 is dead or even dying. It provides some clear pointers for Freelancers to take on board for the future. It will also serve as a warning to the Revenue to be more thorough in their fact finding.

What it does confirm once again is that most IR35 cases have degrees of uncertainty with strong and weak points. Provided you receive skilled advice the chances of eventually winning your case are very strong.

IR35 and the Revenue are a little like a medieval knight in armour. They give the superficial appearance of being an invincible juggernaut capable of cutting down any simple soldier who gets in the way. But a soldier who is fleet of foot can keep out of the way until the knight gives up exhausted; and a soldier who gains the assistance of an expert longbow man becomes a very dangerous opponent for the juggernaut, quite capable of inflicting a fatal wound if the expert exploits one of the many chinks in its armour!