IR35 case law developments

The recent case of JLJ Services Limited v HMRC (2011) has indicated which tests carry the most importance in establishing IR35 status.

Mr Spencer, an IT specialist, provided services to Allianz through his own limited company between 2000 and 2007. He was supplied to Allianz through Highams Recruitment Limited, initially to perform project work, but the relationship changed at the end of 2003 when Mr Spencer was offered either employment or an indefinite engagement and work renewed on a new annualised, rather than a project, basis.

Judge Howard Nolan ruled that IR35 did not apply for the first 3 years of the contract, but that a different approach should be taken from the beginning of 2004 onwards. HMRC was claiming in the region of £141,000.

Certain IR35 indicators were discounted:

•    The substitution clause in the contract between Highams and JLJ Services was ‘basically irrelevant “window-dressing”’ as JLJ Services had no other employees to offer as substitutes. Allianz was interested in the qualifications and suitability of Mr Spencer and no substitute was ever offered in 7 years of work. The clause was ‘inserted to achieve the desired tax purpose’ and had ‘virtually no bearing’ on the decision.

•    Although both parties contractually agreed that the intention was not to create a relationship of employment, this was of ‘very little or no importance’.

•    The judge also argued that the mutuality of obligation test is ‘nearly meaningless’, although there was a difference between Mr Spencer’s circumstances up until the end of 2003 when he was exposed to the risk of gaps between assignments, and post 2003 when this was no longer the case. This was significant in supporting that there had been a change in the relationship.

However, control is still key: it was accepted that during the first 3 years of engagement, where the work was related to particular tasks and projects, the control over Mr Spencer’s work was limited. Yet when the link with projects was broken, replaced by general work within the organisation, the Tribunal believed there would be greater opportunity for control.

When it became clear that Allianz wanted Mr Spencer’s services permanently, he became one of Allianz’s key computer experts, available for work that was likely to be available indefinitely, and it would have been appropriate to regard the notional relationship from January 2004 onwards as one of employment.

Emma Hamilton of Lawspeed said ‘this case is yet a further example to show that having a project basis to the work performed is a crucial indicator of IR35 status – not only for dispelling mutuality of obligation but also highlighting an absence of client control. Once the project element disappeared in 2004, the tax status changed.’

Unfortunately the case seemed to turn on Mr Spencer being offered more permanent work. Whilst Mr Spencer was adamant that if he was offered employment it was declined, it was unclear whether the more permanent work on a contractor basis was also declined. This means that contractors need to be more alert to changes in their clients’ expectations – if it is suggested that a client has begun to think of a contractor as more of a permanent than temporary fixture, they may need to seek alternative work to retain their IR35 status.