Usetech IR35 ruling: further analysis and appeal prospects

My initial analysis was drafted in some haste on Monday. See here for details. I have now had more time to review the judgement and consider it further. I have also read the many comments on the original thread, which have been very useful. Here are some further thoughts.

There are some significant issues of concern in the Commissioner's judgement. Whether they provide sufficient grounds for a successful appeal I will leave to the lawyers to mull over. However I suspect that, as with the Synaptech appeal it might be difficult to argue that the SC has made any errors in law even if his assessment of the facts and case law might differ from an appeal judge.

There are several worrying issues.

Substitution

The SC appears to accept that the Right of Substitution clause in the contract between Usetech and the agency is valid; as he says:

"I do not go so far as to say that the right to substitute was a sham"

There is no discussion of whether the contract between the agency and the end client ABB has any similar provision. The SC does appear to place considerable weight upon the evidence of the ABB human resources manager that they would only have accepted a substitute after an interview and only on the basis that they were supplied by a new contract via the agency.

Clearly this statement needs to be supported by the contractual facts between the agency and ABB and there does not appear to be any evidence as to what those contractual terms and conditions were. It is interesting, and surprising, that the SC, when mentioning this contract between the agency and ABB, actually says:

"I was provided too with a copy of the contract between ABB and NES; it is not relevant for present purposes, save for one point to which I shall return."

There may be some scope on appeal to explore the issue of whether the SC should have taken, apparently as gospel, what the ABB human resources manager said regarding a substitute without apparently also ensuring that this was consistent with the contractual facts. However, I suspect that the facts might well show that if a substitute had been used it would have been on the basis that the original contract with Usetech was terminated and replaced by a new contract with a new supplier.

It is this aspect that appears to weaken the effectiveness of the ROS. Ideally the agency contract with Usetech should have gone on to make it clear that the agency and the client accepted that any substitute was to be engaged by Usetech and that Usetech would remain responsible for the work and for paying the substitute.

Had Usetech been able to obtain a client confirmation that they would accept a substitute provided they were happy about the substitute's expertise (which could be gained by interviewing the substitute) and provided Usetech remained responsible for the substitute's work then I don't think the SC could have dismissed this ROS so easily.

Certainly the ROS as included in the agency contract is stronger than, for example, was the case in Synaptech.

Mutuality of obligation

This is another vexed issue. Case law in this area remains difficult to apply. As PAULSC has set out in some detail on the other thread there are cases that reach somewhat different conclusions.

Clearly the statement by the SC that:

"; if, unexpectedly, work he had intended to perform at a weekend was cancelled, or for some other reason there was no work for him to do (he gave the example of ABB's computers crashing), he was sent home or to his lodgings and, unlike permanent, employed staff, he was not paid in those circumstances: he was paid only for the hours he actually worked"

implies a lack of aspects of mutuality of obligation that one normally associates with the employer/employee relationship. The SC does appear to place total reliance on the fact that if Usetech did some work then it would be paid. This is no more than is the case whenever a self-employed person renders a service to a client.

Not having been at the hearing I cannot comment on what might have been argued but not reported in this judgement. But I would be surprised if the only case law argued on behalf of Usetech was the Synaptech case. Nevertheless the SC's view is in strange contrast to the view reached by the General Commissioners in the case of 'Victor', that I reported on earlier this year. In that case they accepted that there was a lack of mutuality between the client and the freelancer in what seems to be fairly similar circumstances to Usetech. Unfortunately the decisions of General Commissioners are not publicly reported and carry no weight before the SCs or Higher Courts.

So here again there might be scope for an appeal.

Other clients

Another issue that does not appear to have been properly explored is that of Usetech having other work. Again we appear to have the SC relying on the comments of ABB's HR manager that:

"he would not have approved of Mr Hood's doing significant amounts of work for other companies while he was engaged by ABB "

However, is this based on their contractual power as per the contracts or is it merely the manager's personal view? It is not clear. We do not know if Usetech's agency contract had any clauses that covered this situation.

Conclusions

Having reviewed the judgement again it seems likely that a lawyer could argue a good case for there being some issues around which an appeal could be based. However, having sat for two days in the unsuccessful Synaptech appeal in the High Court last year, I have to say that there remains a big difference between having valid areas of disagreement and being able to convince a High Court judge that the Commissioner erred in law in the conclusions he reached on the facts that he established.

This decision emphasises the value for freelancers of obtaining client confirmations before the Revenue get involved. The latest version of UKTECH's Freelancers Outside IR35 (FO35) has specific guidance on this issue and how best to obtain such confirmations.

It is interesting to contrast the client evidence between this case and the 'Victor' case. There is a strong impression from the Usetech case that what was being said by the HR manager represented broad statements of policy rather than actual statements of day-to-day operations. In Victor's case the client team leader was clearly setting out how Victor worked in practice.

There also seems to be a contrast between this Special Commissioner's attitude to the hypothetical contract that IR35 constructs and the Special Commissioner in the Tilbury case I reported on last year. In that case the Commissioner was quite clear that the hypothetical contract should be constructed on the basis of the actual contracts and working relationships.

In Usetech it appears that the Commissioner has taken the evidence of the ABB managers without clearly relating this to any actual terms and conditions existing in the contracts. I say 'appears' because there is a lack of detail in the judgement as to what all the contractual terms and conditions were, especially in the agent/client contract.

Finally, I note that the Revenue has stated in the press in relation to this case that "If there is abuse going on then we must clamp down on it".

It seems strange that the Government regard Bill Hood, who has been earning his living selling his services through his own company and taking all the risks that this involves, as an "abuse" but has nothing to say about a large company like ABB Vetco Gray. On the admission of their own HR manager ABB cynically uses contract staff to avoid the costs and liabilities associated with employing staff, while retaining all the control that an employer expects to exercise.

Clearly there will come a time when the Government will have to address the employment rights issue that was one of the original injustices they claim IR35 was meant to address. This decision illustrates once again that in dealing with one apparent 'injustice' IR35 has created another!