Lime-IT IR35 Victory - Full analysis of the decision
Decisions of Special Commissioners, unlike judgments of the High Court, do not create legal precedents. Nevertheless, they are of some persuasive value and particularly as there have, so far, been only three decisions by the Special Commissioners on the IR35 legislation, each decision is the subject of some considerable interest.
Lime-IT Limited v Michael Justin (an officer of the board of the Inland Revenue) is the third and latest decision by the Special Commissioners on IR35. The facts found by the Special Commissioner, in this case, were as follows:
- Lime-IT Ltd had carried out work for Marconi over the course of a year.
- There was a contract between Lime-IT and ERS (an agent) and another contract between ERS and Marconi and under these arrangements, the work was actually carried out by Miss Fernley, the sole shareholder and director of Lime-IT, personally.
- The work was on a number of specific projects and the completion date specified in the contract was an estimated date it being understood that the work would be finished upon completion of the projects.
- Similarly, although the contract assumed an estimate of 37 hours to be worked in each week, the actual hours worked varied from zero to 52.5 hours per week and she ‘worked the hours needed to get the job done’.
- Lime-IT had purchased a laptop computer costing £1,600. There was no contractual obligation to do so but it was often more convenient for Lime-IT to use its own equipment than to use that available at Marconi's site.
- Payment for work carried out was at an hourly rate with no sick or holiday pay.
- In parallel with the work at Marconi, work was carried out for four other clients.
- Invoices were not always paid on time and in the case of two invoices legal action had to be threatened before they were paid with interest.
- The worker, Miss Fernley, was not integrated into Marconi's workforce in that she was treated differently from an employee: for example, her security pass identified her as a ‘contractor’ and she was not entitled to use Marconi's sports facilities which were made available to employees.
Given these facts, it is not surprising that the work was held to come outside IR35. This case will be of some interest, however, for what it says about the way the IR35 "hypothetical contract" is to be constructed.
It is well established that in the case of ‘real’ contracts if a worker is registered for VAT then that is a factor tending (all other things being equal) to show self-employment. The new question which the IR35 legislation has raised is whether the fact that a company is registered for VAT has any significance. Does the fact that a worker's company is registered for VAT mean that if there had been a (hypothetical) contract between worker and client then the worker would (hypothetically) have been registered for VAT and therefore more likely to be self-employed? Alternatively, is the fact that the company is registered for VAT merely a consequence of the fact that a company cannot be an employee, and thus a neutral factor as regards IR35? The answer which the Special Commissioner gives is that the company's VAT registration is a neutral factor.
It is established that in the case of ‘real’ contracts the intention of the parties as to whether the contract is to be one of service or for services can be significant in borderline cases. How does this work in the case of IR35 hypothetical contracts? The answer which the Special Commissioner gives is that it is very difficult to impute an intention with regard to a contract which is hypothetical so that this is a factor which is not likely to be of assistance in IR35 cases.
The case-law clearly establishes that that in the case of ‘real’ contracts if the contract allows, but does not require, the worker to carry out any work personally, then the contract cannot be one of service, and this is so even if the worker, in fact, chooses to do all the work personally (providing, of course, the contract is not a sham). The question arises in the case of IR35 ‘hypothetical’ contracts as to whether, if the contract between the worker's company and the client provides a right of substitution but that right is never in fact used, that right would exist in the hypothetical contract given that the hypothetical contract is constructed partly from the real contract but also partly from the non-contractual interface between worker and client (per Mr Justice Burton in R (on the application of Professional Contractors Group Ltd and others) v Inland Revenue Commissioners). On this point, it is difficult to separate the Special Commissioner's decision in the particular case from his view of the general principle. Lime-IT's contract did contain a substitution clause which the Special Commissioner finds was not a sham, and even though it was never, in fact, used he finds that the right of substitution means that the hypothetical contract cannot be one of service. However, he does so because he finds that "there is no reason to suppose that [Marconi] would not have been willing to pay the same rate for a substitute of equivalent expertise as the contract requires" even though he has no evidence from Marconi. In this regard, he says that in future Special Commissioners will wish to explore at a preliminary hearing whether evidence can be obtained from the client. The implication seems to be that whilst an unused substitution clause can bring a contract outside IR35, evidence from the client will, in future, be needed to establish that the right of substitution was regarded by the client as part of the working relationship.
One perhaps surprising aspect of the decision is that the Special Commissioner takes the view that "on the face of it" the IR35 hypothesis covers only the contract in question and other work done by the worker is not to be taken into account. Fortunately for the taxpayer in this particular case, he takes the view that the work is outside IR35 even without taking account of other work performed by the worker so that he does not have to definitely decide that issue. The report of the Lime-IT decision indicates that the case of R (on the application of Professional Contractors Group Ltd and others) v Inland Revenue Commissioners (in which Mr Justice Burton said that "the question of whether the service contractor himself has, prior to that engagement, performed or is, simultaneously with the engagement, performing - services for others, and is to be construed as carrying on business on his own account, is and must be a central consideration.") was not cited to the Special Commissioner and perhaps if it had he would not have been in doubt on this particular aspect.
The issue of whether, where an agency is involved, the IR35 hypothetical contract to be considered is a contract between worker and agency, or alternatively a contract between worker and end client, does not appear to have been raised in the case, it is apparently assumed that the work/end client hypothetical contract was the relevant one.
In summary, the Lime-IT decision is in line with previous cases but does contain a clear statement that the end clients view of the working relationship is of some importance and that in future evidence from the end-client is likely to be required.
Article kindly provided by John Antell. Who is a barrister at Godolphin chambers and specialises in employment law particularly unfair dismissal and employment status including its tax and NIC consequences? He advises contractors and others on IR35 and other employment status matters including the review or drafting of contracts, and he represents taxpayers on appeals to the Tax Commissioners and the High Court. He is the author of Employment Status published by Butterworths. Neither the author nor the publisher can be held responsible for any actions undertaken as a result of the opinions expressed in this article which are necessary of a general nature and cannot be a substitute for individual legal advice on your own particular situation.