IR35 Case Lost at Special Commissioners

An IR35 case has been lost at the Special Commissioners amid much criticism that the case was 'short of real evidence' and that much of the efforts in the freelancer's case were 'misdirected'.

The case involved Netherlane Limited, owned by IT freelancer, Martin Renshaw, who was represented by Mr AD Robertson, FCA. The case was heard in the middle of December by Special Commissioner, Dr John F. Avery Jones. The Revenue was represented by Mike Faulkner. Netherlane was offered a contract by Resource Matters Ltd (RML) which required them to provide IT services at the Cardiff premises of their client NPI Limited (NPI) (which later became AMP). This involved supporting and maintaining a computer system under a series of six month contracts.

An employee
In a lengthy summary of the case which explained the Commissioner's reasons for finding Mr Renshaw caught by IR35, Dr Avery outlined the issues which influenced his decision.

He said: "Standing back and asking myself would Mr Renshaw be an employee under such a hypothetical contract, the factors that I consider are important in the present case are that he was the person in charge of a team in the sense of having management responsibility for the team, and in turn he was regularly reporting to a manager; that he was carrying out continuous support and maintenance work rather than a specific assignment; that he was paid a daily rate and could not therefore earn more by working longer hours; that he did not work for other clients; and that the arrangement would be terminable on four weeks' notice, all of which point towards an employment relationship.

"Other factors point away from employment, such as the absence of any usual employee fringe benefits (although in practice he had a normal holiday entitlement), and the method of payment against invoices and work sheets. Some other factors do not seem to me to be important to this question, such as the provision of equipment, and the lack of control over how he did his work.

"Weighing these all up I consider that clearly he would be an employee. In coming to this conclusion I am fully aware of the different risks involved. Mr Renshaw had absolutely no security at the end of each six months term and the reason that his contract was renewed was no doubt because he was good at his job. But in return he was paid more although against this he received no fringe benefits.

"To him, the difference in risk of not being able to renew the contract was no doubt very important and made him completely unlike an employee. But IR35 does not seem to pay attention to this as it starts from the actual contractual position and asks one to assume that it is replaced by a hypothetical contract. One therefore looks at each separate six-month contract separately. But the fact that there was actually a continuous series of six monthly contracts unrelated to any particular assignment merely makes the case for looking at this as an employment relationship stronger."

Criticism
Dr Avery was critical of the presentation of some areas of the case, which he complained was 'short of real evidence'. Although he said much of how well prepared the Revenue was and that the Revenue and Mr Robertson (for Netherlane) 'had put in a tremendous amount of work in preparing the case' He added: "In spite of all this I regret to say that I thought that much of the efforts on the Appellant's (Netherlane) side were misdirected.

The Special Commissioner thought he had been given a survey of employment law rather than a detailed description of the type of work done.

Dr Avery said: "I found myself extremely short of real evidence particularly about the other circumstances in which Mr Renshaw performed his services. Mr Renshaw's witness statement devotes a mere nine lines to "nature of services." The rest of the witness statement is really argument or a description of the contractual position. When, having read all the papers, I started hearing the case all I had about the nature of the work were the two statements which Mrs Gibb (Revenue) had. After Mr Renshaw's evidence in chief I asked if he would describe a typical day as I still felt that I did not have a proper picture of what the case was about.

"While I appreciate all the work that went into the preparation of the case what would have helped me much more than a survey of employment law would have been a detailed description of the type of work that Mr Renshaw performed throughout the various contracts. By the end of his evidence I had a good idea about this but this type of basic factual evidence should have been available also to the Revenue before the case started.

"I was even more hampered by the lack of any evidence from NPI, which seems to be a recurring problem with IR35 cases. The client's interests are not the same as the Appellant's and in examining the terms of a hypothetical contract it is necessary to have oral evidence from both parties to such a contract in order to obtain a clear picture. This was particularly the case here where Mr Renshaw had never seen the upper level contracts and the only evidence I originally had from RML was from Mr Summers, who only joined RML in 2002, and the only evidence from the NPI side was Mr Clark's witness statement of less than one and a half pages.

"What was required was oral evidence to put some flesh on the upper level contract. That would be necessary in any appeal but here there were suggestions that NPI were using an old form of contract that did not reflect the true position and therefore I was being asked to pay attention to an upper level contract dated 15 September 2002 on the assumption that there was an earlier version that could not be found."

Information
There was some debate about who was responsible for finding or providing the information. Mr Robertson made a case that it was the Revenue's responsibility to obtain all the facts themselves.

However, Dr Avery described this contention as 'a misunderstanding of the law'. He said: "It is not for the Revenue to go looking for facts that are in the taxpayer's knowledge, particularly so in this case when Mr Renshaw declined to attend an interview (as he is perfectly entitled to do)."

Ambush
The Commissioner's criticism continued over some confusion as dates, lack of witness statements and different contracts - and at one stage, he offered the opportunity of an adjournment which was not taken.

He said: "The Revenue were under the impression that Mr Clark (formerly NPI) would be called as a witness; the tribunal directed on 14 September 2004 that if he had not consented to give oral evidence within 30 days of the direction the Appellant would make a request for a witness summons.

"It was also unfortunate that Mr Summers (RML) changed a vital date in his witness statement at the start of his evidence which meant that I would have heard no oral evidence from either party to the upper level contract. I gave the Appellant the opportunity of asking an adjournment. Having Mrs Quinn's evidence by telephone conference without any witness statement was very much a second best.

"I should like to say that I found Mr Faulkner's (Inland Revenue) skeleton extremely helpful. It was clear, succinct and fully cross-referenced to the documents, and his use of different colour paper for different types of contract was most useful. He was faced at the end of the first day with the difficulty that Mr Summers had explained for the first time the relevance of the 15 September 2002 contract that quite reasonably he had treated as irrelevant.

"The procedural rules are designed to avoid any ambush and they did not work on this occasion.

"Accordingly I dismiss the appeal."

Full details of the Commissioners' decision are available here:

Netherlane Limited - IR35 case

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Posted 20/02/05

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