A recent High Court ruling has strengthened HM Revenue & Customs’ (HMRC) hand in the ongoing IR35 battle.
The High Court has recently released its Judgement in the case of Dragonfly Consulting Ltd v Commissioners of HM Revenue & Customs. This upholds the original ruling of the Special Commissioners in favour of HMRC that the Director of Dragonfly, Jon Bessell, was providing his services to the Automobile Association (AA) under terms which, if not for the existence of the company, would have constituted employment. A number of commentators have suggested that the ruling is “game, set and match to HMRC”. That isn’t the case, but Dragonfly has set some new precedents and changed the way in which employment status, and IR35 in particular, is viewed. HMRC is expected to rely heavily on the High Court’s decision.
Briefly, Mr Bessell was an IT systems tester providing services via his own company, Dragonfly. The company had obtained work with the AA. There was no direct contract between Dragonfly and the AA, but rather between both parties and an agency, DPP. Throughout a series of consecutive contracts, Mr Bessell worked on a series of different tasks set by the AA, which were subject to its guidance, checks and supervision.
Dragonfly’s contract with DPP contained clauses regarding substitution, but these were not replicated in the contract between DPP and the AA. Furthermore, as became clear, the AA had specifically selected Mr Bessell and expected him to undertake the work personally. Dragonfly, however, was not a party to and, indeed, had never seen, the contract between DPP and the AA.
The High Court considered two main issues – “substitution” and “control”. It is on these issues that new legal precedent appears to have been set.
Substitution
As became clear from the evidence given by managers from the AA, it was Mr Bessell that they wished to utilise and not Dragonfly or any other systems tester. The absence of any substitution clause in the DPP/AA contract confirmed this; as did the managers’ evidence that substitution “just would not happen”. The wording of the Dragonfly/DPP contract was not deemed relevant; the AA’s intentions were clear that what it required was Mr Bessell’s personal service. The Judge said that, “the AA did not want any competent tester, they wanted Mr Bessell”. Consequently, he concluded that Mr Bessell’s personal service was required and no right of substitution existed.
Control
It has long been accepted that the degree of control which would be exercised over a skilled professional person would be lower than that over, say, an unskilled labourer and that the old test of “how” the work is done is not particularly relevant to this category of worker. What the High Court considered was what degree of control was exercised, or could be exercised, over Mr Bessell by the AA?
Again the DPP/AA contract was quoted. It gave the AA the right to control, supervise and monitor Mr Bessell’s work, a right which the AA exercised. Mr Bessell was not engaged to undertake a specific, self contained project, but rather a series of ongoing tasks which were set out and provided to him by the AA. Work was allocated to him and, as part of the contractual arrangements, he was obliged to undertake it.
The Special Commissioner had commented that “the degree of control was what one would expect in the case of a skilled professional employee” and that was endorsed by the Judge.
Conclusions
One stark message which arises from Dragonfly is the extent to which the terms in the “lower” contract (in this case, Dragonfly and DPP) must mirror those in the “upper” contract (DPP and the AA). Clients working through agencies must have sight of the “upper” contract as, without it, they cannot be certain that it does not contradict the carefully-constructed form of words which will doubtless appear within the “lower” contract. Any worker who fails to obtain sight of the “upper” contract could be in serious danger if challenged under IR35.
It cannot be stressed enough that contracts must always be an accurate reflection of reality. In this case, the AA wanted Mr Bessell, expected Mr Bessell, and would have accepted no-one other than Mr Bessell. That constitutes personal service and a cleverly-worded contract cannot change matters. Substitution clauses that include a veto clause for the client, or their permission before any substitution is exercised, will no longer work.
As for control, an engagement that merely allows a client to obtain a resource, which it can allocate to different tasks and direct and which is subject to the same checks, controls and supervision as regular employees is unlikely to pass the new test. The fact that the worker is not subject to control in the sense of being told “how” to do the work can no longer be relied upon as a defence.
The status and IR35 landscape has changed significantly with Dragonfly, but all is not lost. What the case shows is that well-worded contracts are not enough.. All contracts that constitute the relationship must be considered, including those contracts which, in the past, may have been withheld from the worker (such as the “upper” contract). The real intent of the parties regarding personal service must be established and be consistent with the contract. The extent, or absence, of any control, monitoring and supervision should also be set out in the agreement and the specific tasks to be undertaken set out, rather than just a series of tasks to be laid down by the client and which the worker is obliged to undertake.
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