Tue, 1 Mar 2011

HMRC gets ‘bloody nose'

HM Revenue & Customs has been given a ‘bloody nose’ in its attempts to establish employee status for a freelance contractor under its IR35 rules. The controversial rules attempt to illuminate the grey area that arises when an independent contractor carries out regular, continuous work for a client.

In the latest case, a Bristol tribunal found in favour of MBF Design Services, run by Mark Fitzpatrick, which had a contract with Airbus. Since 2003 the aerospace giant had hired MBF under a contract via intermediaries at an hourly rate that increased if Fitzpatrick worked more than 35 hours a week. The Revenue claimed that Fitzpatrick was a disguised employee of the company, and should pay income tax and National Insurance through Airbus’ payroll.

In 2009 Fitzpatrick appealed against HMRC’s ruling, finally receiving a favourable verdict last month. Matt Boddington from Accountax, MBF’s representative in the proceedings, said: ‘This is a significant bloody nose for HMRC, and highlights that if parties arrange their affairs correctly, and if these arrangements are an accurate reflection of reality, then the IR35 legislation will not bite.’

Key to the ruling was the tribunal’s finding on mutuality of obligation. The tribunal ruled that working on site was not a sufficient indicator of employment. Although Fitzpatrick’s design work had to be done on computers at Airbus’ premises, this was no different to freelance electricians or plumbers being called out to work sites.

Airbus’ right to cancel the contract without notice indicated a lack of mutuality of obligations. The tribunal learned that on some occasions when there were computer shutdowns, contractors were sent home without pay while employees stayed on site.

Interpretation of IR35 rules depends upon unique circumstances. The implications of being deemed an employee become greater next year with the introduction of compulsory pension contributions.