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Markel Tax

19 Apr 2021

Is a long engagement automatically caught by IR35?

We often hear from clients that the length of their contract makes them worry they might be caught by IR35.

Whilst the length of an engagement itself is not a test, it does affect a key area - mutuality of obligations (MOO).

MOO tests whether the client is obliged to offer work to you, and whether you are obliged to accept work. In an employment scenario, an employee is contractually obliged to provide their service, often times for a specific number of hours per week. In turn, the employer is obliged to provide continuous work to the employee and pay them.

An independent contractor should not be obliged to accept any offers of work from the client, and the client should not be obliged to make any offers or make payments for periods where no services are provided.

Mutuality of obligations is the hardest factor to argue out of the three key tests. Case law that deals with MOO is hard to navigate and often examines different aspects of MOO. Nonetheless, it is an important factor to understand. This article is a brief overview of the case law and what we can learn from it about the length of contracts and status.

So, what’s the issue with a long engagement?

Where work has been consistently offered by the client and accepted by the worker – as in the case of a long engagement - it makes it harder to argue that MOO does not exist.

For example, in the case of Airfix Footwear Ltd v Cope (1978) Mrs. Cope assembled heels for Airfix reliably for seven years. She was not entitled to holiday or sick pay, and carried out the work at her own home, yet the judge concluded that she was an employee on the basis that sufficient MOO had built up over time. A continuous relationship had formed between Mrs. Cope and Airfix which rendered her an employee.

This would be a worrying judgment if not for the fact that Mrs. Cope was also found not to be in business on her own account. Had she been working within the factory she would be doing exactly the same job as an employee and the judge stated Mrs. Cope was of “otherwise little value in the labour market”.

So whilst the length of the engagement here was clearly an issue as it was found to create MOO, it was compounded by the absence of any indication that Mrs. Cope was actually an independent contractor in any way other than by label.

Hypothetically, if Mrs. Cope had had the right to send a substitute to assemble the heels, or could have shown that she controlled how she did the work, would the judge have ruled the same way?

MOO can be present in short-term engagements

The case of Cornwall County Council v Prater (2006) dealt with a teacher who was engaged by Cornwall County Council under a succession of separate contracts for a period of 10 years. The Council would offer Mrs. Prater a pupil to tutor at their home and she was free to reject work without penalty.  However, once she accepted a pupil she was obliged to fulfill her commitment to that pupil and the Council would offer work until that engagement was fulfilled.

It was found that each individual contract, regardless of how short it was, had MOO and therefore had to be a contract of employment. Once the pupil was accepted by Mrs. Prater, both parties had to see it through till the end and this was enough to create an employment relationship.

Yet due to the fact that once an engagement ended, there was no obligation for either party to accept/offer further pieces of work, the judge warned that an overarching contract of employment would be impossible to prove.

Can long engagements lack MOO?

A good example of when the longevity of an engagement did not automatically define the contractor’s status is the case of Parade Park Hotel v The Commissioners for Her Majesty’s Revenue and Customs (2006). In this case (which was successfully defended by Markel Tax), Mr. May had been engaged by Parade Park Hotel from 1999 to 2004 to carry out maintenance jobs. He was found to be able to pick and choose what jobs he did, and it was found that often times he would not show up to work at all. Parade Park was not obliged to offer jobs to Mr. May, and it was evident from his lack of showing up that Mr. May did not feel obliged to offer his services.

Following the Cornwall Country Council judgment, HMRC tried to argue that whilst there may not have been an overarching contract of employment, there was enough MOO within each piece of work to amount to create an employment relationship. The expectation was that work would be available and the fact that on many occasions Mr. May did do the work and was paid for it was enough.

Fortunately, HMRC’s argument failed. The judge found that there was no MOO between jobs and no MOO within jobs, and Mr. May was deemed to be self-employed. Very succinctly, the judge said: “...the longevity of the arrangement is not a definitive indication of employment. It is possible for an independent contract to be engaged over a long period without his or her status being changed by the length of the engagement.

It must be noted that Mr. May was also able to prove he had control over the way in which the work was done, and was required to fix any defective work at his own expense. The judgment was not based solely on MOO - the judge took into account all three key tests and looked at the engagement as a whole. While there was a requirement for personal service in this case, there was a lack of MOO and control which swung the balance of probabilities strongly towards self-employment.

To conclude, while MOO is an important player, it must be noted that the other factors will also be scrutinised and a judgment is unlikely to ever be based solely on the presence or lack of MOO. Ring-fencing is the best way to minimize risk: should your lack of MOO argument fail, you have the other tests fall back on.  HMRC takes the simplistic view that the sheer existence of a contract between two parties for provision of services in return for remuneration is evidence of mutuality of obligation - as they argued in the Parade Park Hotel case. If you retain the right to control and have an unfettered right of substitution, it makes it much harder for HMRC to prove that an employment relationship exists.

Essentially, the longevity of the engagement itself does not automatically place it inside of IR35 as long as there are other factors which point towards self-employment.

Speak to our team today

We have been advising and defending clients against IR35 challenges since the introduction of the legislation 20 years ago. We offer a complete package of due diligence services to ensure you are well prepared and protected.

Markel Tax’s FeePayer Protect insurance is specifically designed to defend against an HMRC enquiry and even the potential tax losses where you are also the fee payer. What’s more, we are able to provide you with contract reviews including the whole supply chain from end-client through agency to the contractor, support in drafting an SDS, as well as training and on-going support from our tax experts.

Speak to our team today to find out how we can help you protect yourself against IR35 risks. Call 0333 920 1589 or request a call-back.
 
Tagged Status IR35 Construction
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