Cookies on Pinsent Masons website

This website uses cookies to allow us to see how the site is used. The cookies cannot identify you. If you continue to use this site we will assume that you are happy with this

If you want to use the sites without cookies or would like to know more, you can do that here.

Tax ruling finds engineer on contract of service, not for services

Oilrig design engineer Bill Hood has lost a case against the Inland Revenue over the IR35 tax. Hood's company, Usetech Limited, was deemed effectively to be an employee of engineering firm ABB Vecto Gray, not a freelance contractor.07 Apr 2004

The IR35 legislation came into force in April 2000. It was introduced to remove what the Government saw as a loophole for contractors to trade as limited companies to avoid tax and National Insurance Contributions, in circumstances where the individual worker would otherwise be an employee of the client for whom they work.

Critics say IR35 stops prevents businesses in the knowledge-based sector from operating on similar terms to their larger competitors.

Bill Hood had run his business from 1996 to 2003, when a heart attack forced him to stop work. Unusually, the tax hearing took place in Hood's home because he was too ill to travel to the Special Commissioners.

Hood obtained work with ABB through his agency NES International Limited, with which his company, Usetech, had a contract. In 1996 he was interviewed by ABB and taken on for eight months – the actual contract being between NES and ABB.

In May 2000 Hood again began work for ABB - for what was expected to be a matter of weeks, but the work continued for 17 months. Then Hood worked for the company again from February 2002 until his heart attack in May 2003.

Special Commissioner Colin Bishopp was interested only in the period between 1st June 2000 and 31st March 2001, at which time Hood was only working for ABB.

The question was whether Usetech should have been treated as an employee of ABB, despite an intermediary – NES – being the contracting party with ABB.

According to Bishopp's ruling:

"It seemed to me from the evidence that, apart from his not being an employee of ABB, any temporary member of staff was treated, on a day-to-day basis, in a manner barely distinguishable from an employee".

The main factors for the Commissioner in reaching this decision were the methods of allocation, performance and checking of work, and the hours maintained by Hood – all of which seemed to him to equate Hood with a normal employee.

Bishopp was also concerned about the substitution clause in NES's contract with Usetech. This type of clause allowed the contractor to substitute another employee for Hood, and was therefore the basis for the argument that the contractor is supplying services rather than being employed.

The Commissioner did not regard this as a valid substitution clause because ABB would not have accepted a substitute for Hood without first interviewing the individual and, in effect, creating a separate contract with that person.

Bishopp then looked at the relationship between ABB and Hood. He commented:

"The test is, therefore, had there been a direct relationship between ABB and Mr Hood, would it have been a contract for services, or a contract of service? If the former, there can be no question of employment and the appeal must be allowed; if the latter the inevitable consequence is that the third condition in each of the statutory provisions is satisfied and the appeal must fail."

He continued:

"The test I must apply, as it seems to me, is not whether the contractual arrangements are consistent with a relationship of employer and employee, but whether, after applying the fiction that there is a direct contract between 'client' and 'worker', there is anything in that notional contract which is incompatible with the relationship between them of employer and employee."

In his opinion, ABB was looking to employ the services of Hood personally – it did not want the services of any other persons that Usetech might, theoretically, substitute. Accordingly there was a contract between Hood and ABB. The so-called "right" of substitution, said Bishopp, "was largely illusory."

In view of the circumstances, said the ruling, the contract was one of service, not for services, and therefore IR35 did apply.

Dr Simon Juden, of the Professional Contractors Group, which supported Mr Hood in his appeal, described the result as "extremely disappointing." He added that the PCG is considering a further appeal.

More from Out-Law.com