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Marlen IR35 case: contractor pursued by HMRC despite failing all key employment tests
Engineering contractor Phil Hughes failed the key tests of employment in his IR35 case so convincingly that the tribunal Judge Lady Mitting nearly called a halt to the proceedings half-way through, reveals the full ruling transcript. Yet despite this, Hughes, who contracts through his own limited company Marlen, was pursued by HMRC all the way to a tax tribunal over more than two years.
Judge Lady Mitting could not have been clearer, when she said part-way through Hughes’ appeal: “It is our conclusion that there is no mutuality of obligation and the degree of control which would have been needed to establish a contract of employment just did not exist. The appeal therefore should succeed on this basis.” However, despite her comments, she allowed the tribunal to continue the rest of the case, “for the sake of completeness”.
This case also highlights how a ‘one size fits all’ approach is not appropriate for determining employment status. And, it is further evidence that a single ‘in-business’ test, such as is being discussed by the IR35 Forum, would leave many genuine contractors unfairly categorised as employees.
Clear control – ‘what’, but not ‘how’ and ‘when’
Control over a contractor in IR35 cases is usually considered to have three components: control over what is done, how it is done and when it is done.
A distinctive feature of this case is that in terms of ‘what’ Hughes was expected to perform, ie his specific tasking, the contractor was under a large degree of control by project managers of his client JCB. They tasked him with designing specific components of plant machinery and they monitored him regularly.
In terms of ‘how’ Hughes was expected to complete his work, Lady Mitting concluded, “the way in which he did [his work] was very much down to Mr Hughes.” Hughes was told what to design and the specifications needed to fit into the design concept, but not how to design.
It was noted that Hughes was given completion deadlines for the designs created and could only use JCB’s IT systems when on site and during office hours. But he clearly was not told ‘when’ to complete the work and largely worked to his own timetable, informing his project manager about his changing hours out of courtesy.
The hours Hughes kept also set him clearly apart from JCB’s employees, who were not allowed anything approaching the same degree of flexibility. Hughes even worked over the client’s summer shut-down period, when all other staff, excluding security and maintenance, were required to take holiday.
Client confirmed no mutuality of obligation existed
Both the paper trail of contracts between the contractor, client and agency, and the facts themselves, clearly confirmed that there was no mutuality of obligation (MOO) between Hughes and JCB.
Hughes’ project manager gave evidence to the fact that Hughes could expect no work from JCB once a contract had been completed. The contract had a one week termination clause and also specifically excluded Marlen and its personnel from claiming any rights against the client. Both Hughes and JCB exercised the termination clause; JCB to end a contract when budgets were cut; Hughes to start work on a contract with another client at a higher rate.
The tribunal showed up a similarity with the recent ECR Consulting case, which was also lost by HMRC: when JCB’s IT systems went down, Hughes and his fellow contractors were sent home whilst employees were expected to remain at work. Crucially, Hughes did not receive any pay for the occasions when he was sent home for this reason, clearly distinguishing him and other contractors from JCB’s employees.
Substitution challenged by the client, but there was no personal service
Although Hughes’ company Marlen had a substitution clause in the contract with the agency, his project manager provided written evidence suggesting that substitution by Marlen would not have been acceptable.
However, the contracts between the agency and client did not specify Hughes by name, and specifically referred to a contract for services, and the client confirmed that if Hughes has been unable to provide his services, the agency would simply have been asked to supply a replacement.
On that point Lady Mitting commented: “On balance it would seem to us that Mr Hughes’ personal services were not required. JCB wanted a job doing and they wanted it done by a skilled and properly qualified and competent designer. If it was not Mr Hughes, no doubt DDC [the agency] could have provided another.”
It is our conclusion that there is no mutuality of obligation and the degree of control which would have been needed to establish a contract of employment just did not exist. The appeal therefore should succeed on this basis
Judge Lady Mitting
But because Hughes has not proved he could send a substitute, on the topic of substitution Lady Mitting concluded: “However, so ambiguous is the evidence and so untested the proposition that we do not feel this is a factor to which we can attribute much if any weight.”
Evidence of Marlen being a genuine business
The tribunal looked into whether or not Hughes’ firm, Marlen, was a genuine business. Hughes clearly bore financial risk by losing fee income as a result of the early termination of one client contract, and being sent home with no pay when the client’s IT systems went down. He was also expected to rectify any defects at his own expense.
These factors were identified in the ruling in favour of Marlen being a genuine business. However, HMRC claimed that Hughes was on a fixed rate of pay and that he had no opportunity to profit further, both characteristics of an employee. But the judge concluded that, on balance, Hughes bore enough financial risk to point towards a contract of services.
Hughes was required to complete his work on site on JCB’s IT system for reasons of security and access control. But he supplied his own slide rule, calculator and micrometer and had no access to the stationery cupboard, which could only be used by employees.
When it came to the ‘part and parcel’ test, the Judge concluded that it was a neutral factor. This was because, although Hughes was integrated into the design team with his own desk and email account, he called himself a ‘contractor’ in his sign-off and had none of the benefits the employees enjoyed.
Implications of the ruling
The key lessons from this case are:
Substitution clauses between contractors and agencies carry weight, even if they are contested by the client
From an outward appearance, Hughes looked quite integrated into the client’s organisation, but clearly this was not the case – another compelling argument against simple ‘in-business’ tests
Control can be complex and it was in part the contractor’s diligence in recording his hours and activities that contributed to the judge deciding in his favour.
The Marlen case also took a considerable amount of time to reach the tribunal. The years under investigation started in 2003 and notices were given to the contractor on 29 January 2009. Why did it take a further two years for Hughes to become rightfully exonerated?
In hindsight, this case ought never to have reached tribunal stage, as the evidence simply did not support HMRC’s charges. And somewhat tellingly, Lady Mitting observed that the facts did not match HMRC’s interpretation on more than one occasion.
The issue of time to tribunal and the basis on which cases are undertaken are topics for the IR35 Forum to consider as it considers ways to better administer IR35.
Updated: 16 July 2011
