We have commented on many occasions that HMRC and employment tribunals can reach equally valid but contrary views that a person can be both employed and self-employed at the same time. A recent case re-emphasises that just because the taxman regards a person as being an employee it does not follow that that is the correct position in law.
Mark Fitzpatrick is a designer in the aerospace field. He set up his own company, of which he was the sole director and only employee, to provide his services. The company (MBF Design Services Ltd) then contracted with Airbus, via two intermediaries, to provide his services to Airbus in connection with the design of their A380 aircraft. MBF received “fee income” from Airbus.
MBF had a history of contracting out Mr Fitzpatrick’s services of the kind featured in this appeal to a number of different clients, including Westland Helicopters, Strachan & Henshaw and Western Design Systems, both before and after the period when he worked for Airbus.
HMRC considered that Mr Fitzpatrick was liable to PAYE income tax and employee NICs on the monies received by MBF from Airbus in the years 2001-02, 2002-03, 2005-06 and 2006-07. He worked a 35 hour week for Airbus under the direction of Airbus management at the Airbus factory at Felton, using the company’s equipment. HMRC took the view that under what is known as “IR35″ monies paid to MBF were for tax purposes employment income of Mr Fitzpatrick personally.
Mr Fitzpatrick appealed to the tax tribunal.
The issue before the tribunal involved applying what is called the statutory hypothesis to the facts of the case. The statutory hypothesis required the tribunal to establish whether, if the arrangements with Airbus had taken the form of a contract between Mr Fitzpatrick and Airbus, they would have resulted in his being (i) an employed earner of Airbus for the purpose of National Insurance Contributions and (ii) an employee of Airbus for income tax purposes. It was agreed that for the purposes of the appeal the two tests are not materially different.
Mr Fitzpatrick, or more accurately, MBF Design Services Ltd, won.
The tax tribunal found that, on applying the statutory hypothesis, Mr Fitzpatrick was not a hypothetical employee of Airbus but was an independent contractor providing services to Airbus. In other words, the hypothetical contract between Mr Fitzpatrick and Airbus was a contract for services, not a contract of service.
The critical point was that the tribunal found that there was no “mutuality of obligation”, essential for a finding of employment as an employee rather than as an independent contractor. The tribunal pointed out that an obligation on the employer to provide work, or in the absence of available work to provide pay, is a touchstone or feature one would expect to find in an employment contract and whose absence would call into question the existence of such a relationship. An important point was that Airbus had no obligation to provide payments in the absence of available work.
Other key points were that Airbus was entitled to cancel MBF’s contract without notice and that there had been occasions when due to computer failure Mr Fitzpatrick was sent home without pay whereas Airbus’s own employees had to remain on-site. Mr Fitzpatrick worked alongside Airbus employees and other contractors and while the proportion of one to the other varied, it was mostly about four to five contractors to one Airbus employee. Also Mr Fitzpatrick was entitled to do his own research (and did so both at Airbus and at home in his own time) and he was not subject to Airbus disciplinary or grievance procedures. Keeping core hours was strictly speaking a definite requirement by Airbus but in practice was not enforced so long as work done by Mr Fitzpatrick and other contractors was effectively coordinated with work done by the rest of the establishment.
A link to the full text of the tribunal judgment is available here for those interested. It must be borne in mind however that this type of case is very fact specific – in particular systems in the aircraft building industry are not typically replicated elsewhere. Nonetheless the case has been hailed by the anti-IR35 Professional Contractors’ Group as “a significant victory for the freelance community” and is clearly of considerable significance, not only in the context of IR35 but also in other situations (such as unfair dismissal claims) where the question of whether a worker does or does not count as an “employee” is relevant. Given the increasing use of freelance workers generally, this is an important question of law which has to be considered quite frequently and you should contact us for expert professional advice if there is any doubt.