Keith Shepherd, a skilled IT consultant, is the sole director and shareholder or his company, Alternative Book Company Ltd. He has recently lost his IR35 case in the Special Commissioners with the result that he now owes HMRC two years tax and NI contributions. The Court concluded the following:
Mutuality of obligations
The Commissioner found that Mr Shepherd was required to perform services to complete IT projects for which the client was obliged to pay a fee and that the client was also obliged to provide work for Mr Shepherd.
The indications to the contrary were that the client would only pay for the hours worked, and that there was no specific term in the lower (ABC Ltd to agent) and upper (agent to client) level contracts requiring the client to make work available. However, the Commissioner considered those contrary indications were outweighed by the period of notice; the contracts were short and for specific projects; the expectation was that the client would provide 36 hours work, and Mr Shepherd averaged 35.25 hours a week during the two years, which included holidays.
Control
There was a conflict between Mr Shepherd’s and the client’s evidence and the Commissioner preferred the evidence given by two employees of the client.
He found that the client could - and did - move Mr Shepherd to other projects; Mr Shepherd took no steps to find alternative work but waited for the offer of a new contract suggesting he would accept any work from the client; allthough he did not have daily supervision he was required to report regularly and his work was assessed; he was a member of his team rather than working on his own; he was required to work from the client’s premises; and he did not have the freedom to choose his hours of work or take leave without permission.
Substitution
The Commissioner found Mr Shepherd’s submission regarding the right of substitution ‘without substance’ and that the client had effectively contracted with Mr Shepherd to perform the required services. He reached that conclusion becausethe upper level contracts originally specified Mr Shepherd as the consultant supplying the services.; the lower level contracts also named Mr Shepherd as the consultant; the client recruited Mr Shepherd directly for his IT expertise, interviewing him as an individual not in his capacity as a director of a service company; the substitutuion clause which was added did not provide an unfettered right; in an interview in 2002 Mr Shepherd admitted that the substitution clause was of no practical effect and accepted that the substitution clause was inserted to meet any potential IR35 challenge; he offered no substitute during the seven years he wourked for the client.
Overall the Commissioner concluded that the substitution clause was ‘window dressing’, and that the client would have replaced Mr Shepherd if he was unable to carry out the work.
In business on how own account
The Comissioner found no compelling evidence that Mr Shepherd was in business on his own account during his engagement. He did not market his services and his work on other projects was considereed ‘minimal’ and ‘too remote’ in time period.
Mr Shepherd was integrated within the IT department of the client, working there for seven years, doing on average 36 hours a week generally as a member of team, which included employees. He was described as ‘part of the scenery’ by the client, which the Commissioner considered an accurate description.
Intention
The Commissioner found that the lower and upper level contracts specified that the agreements did not constitute or imply an employment relationship between the parties. The insertion of this clause in the hypothetical contract, however, would not be decisive about the nature of the working relationship between Mr Shepherd and the client. The effect of the clause has to be considered in the context of the contract as a whole.
The hypothetical contract
In constructing a hypothetical contract between the client and Mr Shepherd, the Commissioner found it would include a requirement for Mr Shepherd to provide personally the services of an IT specialist; to report on progress; to work at the client’s premises; fixed core hours; and no entitlement to sick pay or paid leave.
He concluded that the hypothetical contract would not include a substitution clause even though it appeared in both the lower and upper level contracts.
The Commissioner said: “I find that the hypothetical contract would have the necessary irreducible minimum to constitute an employment contract. When I stand back and consider the position as a whole I conclude that the picture painted of the relationship between the client and Mr Shepherd was overwhelmingly one of employment.”
The Commissioner therefore found that ABC Ltd should have paid IR35 tax.