Accountax are pleased to announce another IR35 victory.

The case of First Word Software Limited (FWS) was taken before the Special Commissioners in November 2007 by Matt Boddington of Accountax.

Mr Neil Atkins working via his limited company (FWS) was engaged via an agency (Plexus) to provide data migration services to his end client (Reuters), this was a specific specialised project.

Mr Atkins worked within a team of 20 most of whom were contractors.  He worked at the client’s premises and was supplied with a desk, computer and email.  In addition he often worked at home or on the train using his own computer.  He did not have set hours of work and was expected to work the hours necessary to meet timescales and milestones.  His weekly hours varied although he generally started between 8 and 9am and left at 4.15pm. 

He was paid an hourly rate based on weekly timesheets.  He did not invoice for the work carried out on the train or at home.  He received no holiday pay, sick pay or pension benefits.  He did not get an annual pay review or appraisal as employees did. 

He made weekly reports to the manager. 

FWS could send a substitute, if the client and was happy with them, although never did.

FWS had Professional Indemnity insurance, Employer’s Liability insurance and Public Liability insurance. 

FWS did not provide services to others but was free to do so. 

Of the fundamental principles, Dr Brice made the following conclusions:

Personal Service – “I have already found that Mr Atkins did in fact do the work personally, the intention of the parties was that the Appellant could assign the obligations and benefits of its agreement with Plexus so long as the assignee was acceptable to Reuters.  In other words, the intention of the parties was Mr Atkins was not obliged to perform the services personally”.

Dr Brice’s statement above confirms Accountax’s view that in fact the correct case law principle to be applied in IR35 and Status cases is whether the worker is obliged to provide the services personally not whether the worker can provide a substitute.  While a right to send a substitute is no doubt clear evidence as to a lack of personal service, it is not (as this case highlights) the sole test, and is not the same as examining whether an individual is obliged to provide personal service.

Control – When considering control, Dr Brice commented “Mr Atkins was engaged to provide “a small piece of a large jig saw” and the way in which that was done was left to him” and further “Although Reuters decided the thing to be done…Mr Atkins decided the way...”.

Dr Brice’s commentary confirms our view that the fundamental aspect of control when looking at IR35 is the manner in which the services are provided.

Mutuality of obligations – Dr Brice stated “As far as mutuality of obligation is concerned, the evidence of both Mr Atkins and Mr Turner was that if, for any reason, Mr Atkins had been unable to work…during the period of the agreement, the Reuters would not have to find him other work to do and would not have to pay him.  Reuters were under no obligation to continue to make work available for the duration of the 2000 agreement.  These arrangements point to the conclusion that Mr Atkins was not an employee of Reuters”.

This succinctly demonstrates, despite HMRC’s view to the contrary, Mutuality of obligations is i) more than simply payment for work done; and ii) it is an issue of fundamental importance in IR35 cases.

HMRC refused to back down prior to the hearing, relying on witness evidence of the end-client in establishing our client was caught by IR35.  HMRC called two end-client witnesses to give evidence.  Neither of these witnesses knew Neil, neither of the witnesses could comment specifically on his engagement, and one of them wasn’t actually working at Reuters during the period FWS was actually engaged!

Of the witnesses Dr Brice commented in her judgement “I heard Mr Atkins give oral evidence and I found him to be a credible witness.  Where the evidence of Mr Atkins conflicted with the statements…I preferred the evidence of Mr Atkins”.

It has to be said Neil did exceptionally well on the day of the Hearing and managed not to be intimidated by HMRC’s bullish approach in questioning.

This case highlights the importance for accountant’s and taxpayers alike to ensure witnesses are fully prepared in advance of the hearing and know what to expect.  It also highlights, as we have seen in previous case law judgements, the courts are interested in the specifics of an engagement not running commentary on generic circumstances which may or may not apply - Something HMRC need to address in future cases.

The enquiry was worked by David Harmer who believes this case was badly managed by HMRC from start to finish and should never have been taken to the commissioners on what little evidence they had. 

All accountants and advisors should make themselves fully aware of this case as HMRC will no doubt be keen to play down its relevance in IR35 disputes.