Panic in the City

In the last few days it has been reported that City banks and other financial institutions have been bringing their relationships with freelance IT contractors to a premature end. It is believed that this is a knee-jerk reaction to the outcome of the recent Court of Appeal decision in Cable & Wireless v Muscat.

The Appeal Court ruled that Mr. Muscat was an employee of his client, despite the fact that both parties had signed up to a contract that treated the contractor as an independent business. Mr. Muscat had his own limited company whose services were provided to Cable & Wireless through an agency.

Commentators have pointed out that the Mr. Muscat's situation was not typical of freelance contractors, because immediately prior to the commencement of the contract, he had been a permanent employee of a company that Cable & Wireless had acquired. It was a case of ending his employment on a Friday afternoon and re-starting as a self-employed worker on the following Monday morning. Notwithstanding these exceptional features, the Appeal Court's decision appears to have engendered a sense of panic amongst City institutions. Such is the fear and uncertainty surrounding the whole area of employment status nowadays.

Experts in tax status had been warning for some time that any contractors found to be caught by the IR35 rules might be operating under implied contracts of employment with their clients. However, under such circumstances, even if the contractor were to successfully sue his client for, say, unfair dismissal, HM Revenue & Customs would still regard the contractor's own limited company as the employer for tax purposes. The lack of cohesion between employment law and the rules on tax status is clearly nonsensical. There have even been cases where HM Revenue & Customs have tried to claim that self-employed people are covered by the National Minimum Wage legislation. Against this background, a large measure of uncertainty is inevitable.

From the point of view of someone whose job it is to help self-employed workers to retain their status, the general picture is nothing short of tragic. In the case of freelancers who work through their own limited companies, it is in the interests of all parties concerned - contractors, clients and agencies - to enter into contractual arrangements that steer clear of the IR35 regime and protect both agency and client from any suggestion that the worker is an employee in disguise. Nevertheless, we still see many agency contracts that appear to be caught by IR35, and many clients engaging freelance contractors appear incapable of delineating clearly between such workers and their permanent staff.

Keith Preece - Qdos Consulting Ltd

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Posted 01/07/06

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