IR35: Employment Status

A key part of IR35 is determining if someone is an employee. When considering this, you need to understand the issues around employment status.

If a person operating through a personal service company (PSC) would be an employee if the PSC is removed, then the individual should be treated as such. Sounds simple, but determining a person’s employment status is a difficult, and usually fact specific, question. We have seen many recent challenges in this area in the Employment Tribunal (ET) as individuals seek ‘worker’ status; Uber etc.

While not part of this note, there is common consensus that the current laws are out of date given the new ways of working. This is covered in the Good Work Plan, which was the outcome of the Taylor review, but is outside the scope of this note.

While IR35 covers tax and employment law, HMRC has issued some basic guidance on ‘employment status’. This sets out six forms of employment status; worker, employee, self-employed / contractor, employee shareholder, director and office holder. There could be more; volunteers, interns…  

When looking at IR35, the case law covers not just ET decisions but also first tier tax tribunal (FTTT) decisions and, best of all, all decisions at this level are not binding on each other, merely of persuasion. Of the above six categories of employment, the first three are usually only argued in the ET. What adds to the complexity of this area is that there are only two main forms of taxation; employment (PAYE) and self-employed. Those found to be ‘workers’ will often be treated as self-employed for tax purposes.

Therefore, it could be possible for the ET to find someone is employed or self-employed, yet for the FTTT to come to the opposite conclusion on the same facts.

There is no one single definition of ‘employee’ in the employment legislation, so the Courts have developed a number of tests looking at different factors. The case law coming out of the ET and FTTT are focusing on a few key areas:

In the Pimlico Plumbing and Stuart Delivery cases the courts looked at ‘personal service’; i.e. is the person required to provide the work personally/do it themselves. Part of the consideration is whether they can provide a ‘substitute’. The cases seem to accept that an ‘unfettered right’ to provide a substitute will be evidence to show there is no requirement for ‘personal service’ and that would strongly suggest that the individual is self-employed.

However, what may be described in a contract as an unfettered right may not be. This was highlighted in the Stuart Delivery case. Here the delivery driver was required to undertake fixed hours (‘slots’) and had to be available in a certain geographical location for the slot to secure a minimum payment. He could release the slot via an app and, if another delivery driver accepted the slot, he would be released from providing the services. If not, he had to perform the deliveries. This was insufficient for the driver to be self-employed from an employment law perspective and the Employment Appeal Tribunal found him to be a ‘worker’. 

There have been conflicting cases on this point; a factor which is growing in importance. 

Firstly, the case of Ansell Computer Services vs Richardson (Inspector of Taxes) found a lack of ‘mutuality of obligation’ and that IR35 did not apply. Mr Ansell could take time off when he wanted, refuse work if he so chose and provide a substitute. Further, he did not enjoy the same benefits as those employed (sick pay, company car and holiday). However, it was acknowledged that he took no great financial risk and only provided his equipment for some of the time.

In contrast, the High Court in Synaptek v Young (HM Inspector of Taxes) supported the finding that while Mr Stuchbury was in business for himself, there was sufficient ‘mutuality of obligation’. This was largely based on two clauses in the agreement between them. Firstly, that the client would allocate work to Synaptek who, in turn, would allocate work to Mr Stuchbury. Secondly, any of the 3 parties could terminate the contract on four weeks’ notice. There was a substitution clause, but only one that provided that Synaptek would use its “best endeavours” to use Mr Stuchbury, and that any substitute was subject to the client’s consent. As such, it was found not to be a genuine right of substitution and IR35 applied.

Controlling how, when and where an individual works is usually part of the picture, but has, for some time, not been seen as the definitive factor. In Island Consultants Limited v Revenue & Customs the contractor was engaged through Island Consultants (his PSC) for four days a week, but regularly worked more. He did not work for any other clients and worked where and when he was directed. He could work from home, but only when it was approved. There was a substitution clause, but this was later watered-down to an obligation by the client to only consider a proposed replacement. Accordingly, he was found to be caught by IR35 and an employee

There are various ways someone may be able to show they are operating in business rather than as an employee or worker. In Lime-IT v Justin (Officer of the Board of the Inland Revenue), various factors led to the finding that IR35 did not apply, including, there being no regular pattern of working hours, specific equipment was purchased for the work and the agreement contained a substitution clause.

There are other tests that come into play and, as is becoming clear (perhaps the only thing that is), when considering the status of an individual; whether for tax status or employment rights, there are many factors that come into play and rarely will just one aspect be enough to focus on.

The Island Consulting case above probably represents how many people operate and so, from April 2020, there could be huge liabilities transferring to the client, so if you engage contractors, you need to look carefully at how they are engaged and ensure you comply with the laws that will shortly be in force.

When applying the test, you may be able to conclude that an individual is self-employed for IR35 purposes, but there is also risk that they are “workers” from an employment rights perspective. If so, you will need to provide holiday pay and other benefits, albeit these rights will only be enforced by the individual, not HMNRC.

If any of the issues discussed above are a concern to you, or if you would like specific advice, please contact the writer, Matthew Kilgannon, via mk@kilgannonlaw.co.uk or on 01483 388 901. 

20th January 2020. © Kilgannon & Partners LLP