MBF Design Services Limited vs HMRC (2011)

Essential “how-to” guidance from the Tax Tribunal to ensure that contractors are not treated as disguised employees for IR35 purposes.

Mark Fitzpatrick was contracting  with his own limited company, MBF Design Services Limited, through recruitment agencies to Airbus. Engaged to provide design services to Airbus between 2001-2003 and 2005-2007, MBF was engaged for a fixed period of hours.

Whilst there was no reference to a specific project or body of work in the contractual documentation he signed with the recruitment agencies, the tribunal’s decision confirmed the need to consider each IR35 “test” individually (such as control, substitution etc) as the failure of HMRC to win on any count will ultimately defeat their case.

The contracts

MBF were engaged with GED Sitec who in turn contracted with Morson and ultimately with Airbus. Both the GED Sitec and Morson contracts contained clauses dealing with key employment-status indicators such as substitution, control and mutuality of obligations that served MBF well at the tribunal hearing as it made it even more difficult for HMRC to argue that the relationship between Mr Fitzpatrick and Airbus was similar to that of disguised employment.

As the contracts were the starting point for the tribunal in this case, it is clear that MBF was off to a good start by getting the paperwork right.

The tribunal then considered the working practices. HMRC had witnesses at the hearing who were employed by Airbus and Mr Fitzpatrick was allowed to give his version of events personally.

Substitution

Dealing with the issue of substitution, it was clear from the contract that there was a theoretical right for MBF to provide a substitute for Mr Fitzpatrick should the need arise. However, this right had never been used in practice.

The killer blow to HMRC on this issue was when an Airbus employee who was responsible for the work undertaken by MBF confirmed that it would not be impossible for MBF to exercise this right in practice.

This reaffirms the position that it is not essential to provide a substitute in practice, providing that you have a right to do so in the contract and the client agrees to such a right. Evidencing your client’s consent can be done in advance of an enquiry from HMRC in the form of a confirmation letter or by ensuring there is a right to substitute in the contract which the client signs.

Control

The Tribunal affirmed that control can be of little value in cases involving highly skilled workers. However, when considering this issue, the tribunal must consider who controls what work is to be completed, where and when it is carried out and also how the work will be completed.

Whilst it is often reasonable for clients to have a say in what, where and when, ultimately it is for the contractor to retain overall discretion over the services being provided. It is unlikely that a contractor would be able to argue that they are not controlled by their client, if the client also has the power to determine how the work will be completed.

Clients approving and checking the completed work and allocating and co-ordinating work to be undertaken is unlikely to amount to sufficient “control” to render a contractor a disguised employee. However, working hours set by the client with no deviation could prove problematic for contractors.

Mutuality of obligation

The fatal blow to HMRC’s case in this instance, was that the contract could be terminated upon giving little or no notice and the fact that MBF was sent home without pay during computer downtime or when work was delayed whereas employees had to stay on site and engage in other activities.

The tribunal acknowledged that there are mutual obligations in all relationships (i.e. an obligation on one party to work and an obligation on another party to pay for work done). This makes this issue incredibly difficult to decide. The fact that Airbus was not required to pay MBF when there was no work pointed away from there being an employment-like relationship in this case. This, in addition to MBF refusing to work on projects with Airbus due to terms not being agreed, was considered sufficient to rebut the existence of employment-like mutuality of obligations.

However, the tribunal also highlighted the dangers on an ongoing series of engagements that can suggest that there is employment-like mutuality of obligations, despite neither party being obliged to continue the series.

In business of own account

Training – Mr Fitzpatrick received some training from Airbus which could have been detrimental to his case had this not been balanced with the fact that he undertook and paid for other training and during the period under investigation.

History of contracting – the fact that MBF had worked for 3 other clients before and after the period in question helped to demonstrate that Mr Fitzpatrick was in business of his own account.

Rectifying defective work – whilst there was an element of rectifying work as the process went on, Airbus confirmed that any major re-working would have been done at MDF’s expense.

Other factors taken into account – the tribunal considered that submitting VAT invoices for work undertaken; being excluded from the client’s holiday and sick pay arrangements, car, pension and healthcare schemes; as well as being excluded from social functions (including the Christmas parties) and being physically identifiable as a contractor by wearing a different security pass all pointed towards MBF being treated as an independent consultant with Airbus.

When the overall picture was painted for the tribunal in this case, it is clear that an arms length, commercial relationship existed between MBF and Airbus that meant HMRC’s claims under IR35 were unable to succeed.

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