In MDCM Ltd v HMRC  TC 6400, the First-tier Tribunal (FTT) has allowed the taxpayer's appeal, concluding that its contractual arrangements were such that its principal employee was not an employee of the ultimate contracting company, for the purposes of IR35.
MDCM Ltd (MDCM), provides management services to construction companies. It was set up by Mr Daniels and his wife, who are directors and employees of MDCM. Mr Daniels has extensive experience in the construction industry, with a background in quantity surveying as an employee of a major construction company.
If a construction company required someone of Mr Daniel's expertise for a particular job, it contracted with an introductory company, in this case, Solutions Recruitment Ltd (SRL) which contacted Mr Daniels as director of MDCM. If the instruction was acceptable, MDCM and SRL entered into a contract in standard form while SRL and the construction company, in this case, Structure Tone Ltd (STL) entered into a separate contract at a higher day rate for Mr Daniels' services.
HMRC was of the view that MDCM's contractual arrangements were such that Mr Daniels should be treated as an employee of the ultimate contracting company, STL, under Parts I to IV, Social Security (Contributions and Benefits) Act 1992 (the Intermediaries Legislation), commonly known as 'IR35'. Accordingly, in September 2016, HMRC issued determinations to MDCM under Regulation 80, Pay As You Earn Regulations 2003 for years 2012/13 and 2013/14 and decisions under section 8, Social Security Contributions (Transfer of Functions) Act 1999, for the period 6 April 2012 to 5 April 2014 (the Assessments).
MDCM appealed the Assessments to the FTT.
The only issue before the FTT was whether the Intermediaries Legislation applied. If it did apply, it would be for the parties to then try and agree the amount of tax due or otherwise revert to the FTT for the amount to be determined. If the FTT decided that the Intermediaries Legislation did not apply, then MDCM's appeal would succeed.
The appeal was allowed.
HMRC argued that control by STL was the most important factor. Relying on MacKenna J’s comments in Ready Mixed Concrete (Southeast) Ltd v Minister of Pensions and National Insurance  2 QB 497, it argued that control included the power to decide the thing to be done, the way in which it should be done, the means to be employed in doing it, the time when, and the place where it should be done. Further, HMRC argued that it was not a question as to whether control was actually exercised, but the right of control that was important.
The FTT said that it had to determine the terms of a hypothetical contract between Mr Daniels and STL and then, as outlined by the High Court in Hall v Lorimer  1 All ER 250, it had to evaluate "the overall effect of the detail" in determining whether Mr Daniels should be regarded as an employee of STL, for the purposes of the Intermediaries Legislation.
The FTT considered and summarised the hypothetical contract between Mr Daniels and STL as follows:
a) Mr Daniels was not controlled any more than any other contractor and could refuse to work on another site;
b) there was a contract for personal services as Mr Daniels could not provide a substitute to STL (even if the SRL contract said he could);
c) Mr Daniels was paid £310 a day and had to pay his own travel, hotel and other expenses;
d) Mr Daniels took no other financial risks;
e) There was no requirement on either party to give notice to terminate, or entitlement to severance pay, or pay in lieu;
f) STL provided safety equipment to Mr Daniels; and
g) Mr Daniels was not integrated into the STL business.
The FTT did not accept HMRC’s arguments regarding control but did agree that the requirement for personal services and lack of financial risk pointed to an employment relationship. However, the FTT concluded that the nature of the payment arrangements, a flat rate per day with no notice period and no entitlement to any employee benefits, were inconsistent with employment. Further, Mr Daniels was not treated as an employee. Accordingly, the FTT found that under the hypothetical contract required by the Intermediaries Legislation, Mr Daniels would not be an employee.
This decision serves as a useful reminder of the factors which must be considered when deciding whether a person is an employee for the purposes of the Intermediaries Legislation. The decision follows close on the heels of the recent appeal of Christa Ackroyd, a former co-host of the regional Look North programme broadcast by the BBC, who lost her IR35 appeal in February of this year. Although 'employment status' cases are very much fact specific, it will be interesting to see whether HMRC seek to appeal the FTT's decision to the Upper Tribunal.
A copy of the decision can be viewed here.