Given all of the attention given to the ongoing tax issues between the BBC and some of its presenters, it would be easy to come to the conclusion that all personal service company arrangements are bound to end in tears.
That is far from being the case as a recent tribunal judgement shows. The taxpayer involved provided construction management services though his service company on some very large construction projects. Much of the work involved supervision of building works done at night. HMRC challenged the arrangements on the basis that IR35 applied and that the service company should have applied income tax and national insurance through PAYE.
IR35 cases are very odd because they operate in a world of make believe. The existing contractual arrangements are disregarded and the tribunal has to consider what the terms of a hypothetical contract between the worker and end user would have been. It then has to decide whether or not that contract would be one of employment or not. It is difficult enough for a tribunal faced with a real contract between a worker and an engager to determine whether or not it is an employment contract: the difficulties are greatly magnified when they have to apply the same tests to a contract which does not actually exist.
Ultimately this comes down to a balancing exercise. It will be very rare for all the evidence to point in the same direction. In this particular case HMRC argued strongly that the end user controlled what the worker did, for example by specifying the shift patterns he had to work and giving him a list of instructions for the work which needed to be done.
The tribunal did not agree and concluded that in a large project there was a clear structure to the work which had to be done and that an individual working within that structure was not being controlled by the end user. What the tribunal was suggesting here (though it didn’t put it in these terms) was that somebody couldn’t simply turn up and say ‘I want to work on the roof today’ if the foundations hadn’t been dug! He or she has to work within the overall construction plan. That would apply to everybody on the project whether they were employed or self-employed.
What weighed most heavily in the tribunal’s decision was that the contractor would not have been entitled to a notice period, holiday pay or any employment benefits under the hypothetical contract. So the end result was he would not have been an employee if he had been engaged directly. IR35 did not therefore apply.
The case is a useful reminder that, as ever, everything depends on the facts. Based on the evidence which is revealed in the case report it seems to me that it would always have been an uphill struggle for HMRC to make an IR35 challenge stick here and I do wonder whether this was the right case for it to take to a tribunal. It will no doubt give heart to at least some of the many people facing IR35 challenges.
Policing the boundaries of IR35 will remain very important in the private sector because, at the moment at least, the obligation to decide whether or not PAYE applies remains with the service company and not with the end user, as it now does in the public sector. How much longer that will be the case remains to be seen.
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