There has been another decision in the IR35 series about whether a person who provides services through the medium of a company would have been an employee of the client had those services been performed under a contract directly between himself or herself and the client: Dragonfly Consultants Ltd v HMRC SpC 655.
The difficulty here was, of course, that there was no contract between the taxpayer and the client, and some notional contract has to be assumed and then considered. In many cases, it is appropriate to regard the contract between the company and the client as embodying the terms of the notional contract, appropriately amended to reflect the different legal status. In the case of Dragonfly, Mr Bessell was an expert computer systems person and the relevant contract was in respect of services to be performed for the Automobile Association Limited (AA).
Such decisions nearly all depend on their precise facts, and it is difficult to draw any general conclusions – but it is still necessary to apply the appropriate legal analysis to the facts (including the assumed facts under the notional contract), and it is interesting to see how the analysis was undertaken in this case.
There was the issue of control. We know from Ready Mixed Concrete that “control is not everything,” but this seems to have been conveniently overlooked. More importantly, in a wonderfully self-fulfilling paragraph, the Special Commissioner concludes that if there had been a contract between Mr Bessell and the AA, it would have contained a provision that he accepted the AA’s reasonable directions in relation to what he was doing (rather than how he did it). This was not in the real contract, but never mind.
It is interesting to consider this test in the context of an engagement of a concert pianist. You engage the pianist to play with a particular orchestra on a particular day at a particular place and to perform a particular piece. (You even provide the piano and stool). All you don’t do is to tell the pianist how to play – although the conductor will do that. All the relevant elements of control are there (according to the test in Dragonfly), but is the pianist your employee? Clearly not. It would be absurd to suggest it – and the absurdity merely serves to demonstrate the inadequacy of the test that was adopted in Dragonfly.
The Special Commissioner dealt with the crucial issue of mutuality of obligations by saying that there was an obligation to work in return for an obligation to remunerate. Just to say that there was a contract between the parties and each had an obligation to fulfil those obligations cannot be a test of employment or otherwise. It merely confirms the existence of a contract (which is not in dispute) and says nothing about the nature of the contract. The mutuality of obligation requirement must be for the putative employer to be obliged to provide further work and for the putative employee to be obliged to accept it. There was no such obligation in this case.
The third area of critical importance was the right of substitution. We have a difficulty here, because although there was no express right of substitution in the contract between Dragonfly and the AA, there did not need to be, because the right of substitution existed anyway. There was no obligation for Dragonfly to provide a particular person, and they would not have been in breach if they had sent a substitute of equal knowledge and experience to do the work – and, indeed, there had been some substitution in fact. For some reason, this was dismissed as being of no significance.
There was also the issue of personal service. It was established in Express Echo Publications v Tanton (1999) that unless there is a requirement for personal service, there can be no contract of employment, but this objection was nicely overcome by the Special Commissioner assuming that the notional contract provided for personal services. In any event, this can hardly be critical. In my above example with the concert pianist, there can be little doubt that the personal services of the particular pianist are what was required. Demonstrably, that does not make the pianist an employee – so the best that can be said is that even if personal service is required, this is merely one of the factors to be considered.
Interestingly, the Special Commissioner said that the intention of the parties seemed irrelevant. I would have thought that if one is looking at what the contract would have been between the parties, one of the more important features would be the intentions of the parties.
Where does one go with all this? The crucial question is really whether the individual was (or would have been) in business on his or her own account. A subsidiary feature of that test would be whether he is able to increase his profits by his own efforts and bear any financial risk.
Every self-employed person is constrained by the requirements of his or her clients. If not, he or she will not be in business for very long. But doing what your clients want does not make you an employee – it makes you a good businessperson.
In the case of Mr Bessell, one might say the following points are relevant:
- The control element was practically absent
- There was no mutuality of obligation
- He was paid in a manner inconsistent with an employment
- He was not entitled to holidays or holiday pay
- He was not entitled to sickness benefits or sick pay
- He provided his own equipment
- He paid for his own training courses
- He had an office at his home and issued invoices
- He worked for others in addition to the AA
- By working harder outside the particular contract, he was able to increase his income
- By falling sick or having holidays or doing imperfect work, he would lose money and was, therefore, exposed to financial risk (the opportunity of experiencing a loss is generally denied to an employee)
None of these elements points towards an employment – and nearly all of them are directly contradictory to a contract of employment. However, the Special Commissioner considered all these points weak. He said nothing pointed strongly to the conclusion that Mr Bessell would have been in business on his own account. In his opinion, Mr Bessell would have been an employee had he been directly engaged by the AA. Um.