It's almost a year since the extension of IR35 to the private sector! HMRC promised a light touch approach to enforcement penalties during the first 12 months, unless it had evidence of deliberate non-compliance. From 6 April 2022 it's likely that HMRC's approach will become more stringent so organisations should start thinking about reviewing their IR35 compliance.
By way of a quick reminder, under IR35 rules, the organisation engaging the contractor via an intermediary must determine their employment status for tax purposes and whether or not IR35 applies. If it does apply, then the organisation paying the individual's fees will be deemed to be their employer for tax and national insurance purposes.
With IR35, employment status is key. Those who are genuinely self-employed will fall outside IR35.
Even if an agreement falls within IR35, it's not necessarily a foregone conclusion that the individual providing services is a worker of the end client organisation (or even an employee). HMRC are concerned whether someone is an employee for tax-purpose or self-employed. However, there are three categories of employment status when it comes to employment rights: employee, worker and self-employed. Nonetheless, many of the principles overlap. Although IR35 tax status won't necessarily always mirror employment status, it's worth being aware of the latest employment decisions on employment status.
Employment status and the right of substitution
Personal service is necessary for someone to be a worker or an employee. A right of substitution is therefore an important indicator of self employment, both to HMRC for IR35 purposes and when considering employment status for employment rights.
Remember that it isn't just about whether there is a right of substitution in the agreement, but also showing that it is used or will be used in practice. There have been a couple of recent cases in which a right of substitution has been considered.
In Stojsavljevic and another v DPD Group UK Ltd the court looked at whether individual owner driver franchisees who provided delivery services to DPD enjoyed a genuine right of substitution and so were neither employees nor workers. There was a right of substitution but the contractor had to supply a copy of the driving licence of any proposed driver and complete an application form, in order for DPD to authorise that driver. It was found it was implicit that DPD was entitled to be satisfied that a proposed driver fell within the contractual definition of "driver", but had no broader right to refuse any substitute. The claimants had a genuine right of substitution which was inconsistent with employee and worker status, so were self-employed.
By contrast, in Stuart Delivery Ltd v Augustine, the Court of Appeal held that a courier's right of substitution was too limited so that he had to provide personal performance and was therefore a worker. Stuart Delivery Ltd has a technology platform connecting couriers with clients via a mobile app. Couriers can sign up for slots requiring them to commit to being available in a certain place at a certain time in return for a minimum of £9 per hour. They can release a slot making it available to other couriers, but if no one accepts, then the original courier remains liable for completing it.
The Court of Appeal confirmed that the issue was whether a claimant is under an obligation personally to perform the work or provide services. This system was intended to ensure that the original courier did carry out the work and turned up for the slots that he had signed up for. Their limited right or ability to notify other couriers via the app that they wished to release that slot for others to take up was not, in reality, a sufficient right of substitution to remove the obligation on them to perform the work personally.
Employment status and mutuality of obligation
Mutuality of obligation is the obligation to provide work and the obligation to accept that work. It has long been thought that this must exist as a prerequisite for both employment and worker status.
The Court of Appeal's decision in Nursing and Midwifery Council v Somerville has now turned this on its head. They said a requirement to offer or accept a minimum amount of work is not a prerequisite of worker status.
Mr Somerville was a fee-paid panel member on the Nursing and Midwifery Council's (NMC's) Fitness to Practise Committee. His services agreement said he was an independent contractor not an employee. There was no obligation on the NMC to request his services, and he had no obligation to supply services when requested, but if he did he would use "all reasonable endeavours" to attend for the full duration of the hearing. He could withdraw once accepting a booking but had to give notification "at the earliest opportunity". He brought employment tribunal claims for holiday pay and/or unauthorised deductions of wages arguing that he had either "employee" or "worker" status.
The Court of Appeal held that even though the overarching agreement did include obligations that were mutually enforceable, this fell short of being a contract to perform services personally. However, each time the NMC offered a hearing date and Mr Somerville accepted it, there was an individual worker agreement in place. Assuming a hearing took place then he worked under a contract personally to perform services. It did not matter that there was no obligation to offer or accept future work.
It is clear, following this decision, that in order to prove worker status there is no need to show that mutuality of obligation exists. Provided that, as in this case, there is an obligation to provide personal services under an agreement for the duration of that agreement (and the organisation for whom the work is being carried out is not a client or customer of the individual), then it is likely that worker status will be established without the need to show more.
Practical steps
- Review the arrangements you have in place for the receipt of consultant/contractor's services. Check that the contracts reflect the way the services are carried out in reality.
- If there is an intermediary in the contracting chain, consider IR35 and ensure you are complaint with your obligations.
- If contractors are engaged by you directly on a self-employed personal basis, with no intermediary in the contracting chain, are you comfortable they are genuinely self-employed? Is there a risk they are a worker or employee?
- Ensure that any arrangements you have assessed as being self employed/outside IR35 remain so and do not drift over time to a worker/employee relationship.
- Please join our Trowers Tuesday session about IR35 and employment status on 5 April 2022 at 11.30am where we will be taking your questions!
