Stuart Gentle Publisher at Onrec

Victory for contractor in IR35 case


The recent decision in the case of Lime-IT Limited v Michael Justin (an officer of the Board of the Inland Revenue) is the first IR35 status case to be won by a contractor at the Special Commissioners. Although the decision does not set legal precedent, it does underline the principle that contractors can operate outside IR35. This result is good news for all contractors and confirms that engagements via a recruitment agency are not necessarily caught by the legislation.

Lime IT contracted with a recruitment agency, ERS, who in turn contracted with its client Marconi to provide the services of Lisa Fernley. Under the terms of the IR35 legislation the Special Commissioner had to consider if Lisa Fernley would be considered an employee of Marconi if Lime IT (and ERS) were removed from the picture. The Special Commissioner, Dr Avery Jones CBE, summarised the key pointers against the engagement being within IR35 as follows:
1. Marconi contracted for particular projects.
2. The end-date and the number of hours were both estimates of the time needed to complete those projects.
3. Miss Fernley did not work a regular pattern of hours; the hours were dictated by the requirements of the work.
4. The Appellant [Lime-IT] could not be required to do work outside the specification.
5. The Appellant purchased a lap-top with a particular specification specially for use in the job, although there was no obligation on them to do so.
6. The payment terms were 30 days after invoice and they suffered delays in being paid in the way that businesses do.
7. There was a right for the Appellant to substitute another supplier.
8. Miss Fernley did not work alongside any other Marconi employees as part and parcel of the Marconi organisation.
9. During the Marconi contract the Appellant operated as a normal small business with its own office working for four other clients.

This decision confirms the thinking of Lawspeed, which has advised agencies and contractors on IR35 issues since March 1999. The existence of a project properly described in a schedule is key to a contractor otherwise operating as a genuine business. Where an agency is involved in the chain an emphasis on substitution alone should not be relied upon and the contract wording should reflect the actual practise. Commenting on the case Adrian Marlowe, MD of Lawspeed said, ìGiven that the first two IR35 cases went in favour of the Revenue, this decision is excellent news for all contractors. The case demonstrates that correct wording in the contract is essential and it is particularly pleasing that wording in the schedule relied upon by the Special Commissioner was drafted by Lawspeed for the agency ERS. This result will be especially helpful to those contractors that are working through agencies that use contracts and schedules drafted by Lawspeed.î

However, it must be remembered that every case will be decided upon its specific facts. Looking at this case the Special Commissioner, Dr Avery Jones, paid particular attention to the terms of the contract and schedules as well as what happened in practise. Specific words were selected from the schedule to the agency/Lime-IT contract as being particularly relevant. The project description, location, term and hours were all held to support the fact that Lime was engaged on project work, which itself was regarded by the Commissioner as a key feature of ìdeemedî self employment. The words mirrored what happened in practise and were therefore considered highly important. In addition it was held that there was a valid right of substitution, even though Lime IT had not substituted, but this finding was not conclusive in itself.

One other key factor in the case was the lack of evidence from the client, Marconi. The terms of the Marconi-ERS contract were not particularly useful because they were based on a purchase order that was more relevant to the supply of goods than services. In 99% of cases this will not be the reality. As the client was not available to give evidence the Commissioner noted that ìin future cases on this legislation (and its income tax equivalent) the Special Commissioners will wish to explore at a preliminary hearing whether it is possible to obtain evidence from the client.î This will impact upon future cases brought before the Special Commissioners.

Agencies should remain vigilant in ensuring that the terms on which they offer contracts reflect the actual working practices, and that work should be project based if it is to be structured outside IR35. In that event the Lime IT case shows that contractors can operate outside IR35 even on contracts that are for 12 months.

Lawspeed is a legal consultancy specialising in IR35, employment and contract law in the IT, engineering and recruitment industries. The company provides easy access to accurate and practical legal advice for recruitment agencies, contractors, accountants and clients.