In MDCM v HMRC [2018] TC 6400 IR35 did not apply; MDCM’s contractual arrangements were such that its primary employee did not have to be treated as an employee of the ultimate contracting company, he was skilled and experienced and given autonomy in how he undertook his work.
'IR35' refers to a set of tax and NICs rules which apply where:
- An individual supplies their services for an end client via an intermediary (e.g. a Personal service company "PSC").
- The nature of the engagement is such that if that individual were to supply those services directly to the client as a self-employed individual, the end client would, by applying the employment status tests for PAYE treat the individual as its employee.
When IR35 applies, the Intermediary is required to deduct PAYE and NICs from their worker's income from the assignment, if they have not already drawn out substantially all that income as salary.
Mr Daniels the employee concerned, had extensive experience in the construction industry and had set up the appellant company, MDCM Limited (MDCM) in 2004 to provide management services to the construction industry.
- MDCM entered into a contract with an independent introductory company, Solutions Recruitment Limited (Solutions).
- Solutions had a contract with a construction company, Structure Tone Limited (STL).
- Contracts were entered into for Mr Daniels services:
- There was a substitution clause in the contract between MDCM and Solutions in respect of the STL contract although it was found not to have been used.
- STL was not responsible for Mr Daniel’s expenses which were paid by MDCM.
- There was no entitlement to sick or holiday pay from STL, or to any notice period.
- Remuneration was by way of agreed day rates.
- Mr Daniels supervised staff but rarely saw his own STL supervisor.
- HMRC sought to apply the IR35 legislation to a hypothetical contract between Mr Daniels and STL.
- It was accepted that MDCM was a company that could be subject to the IR35 provisions, if the underlying hypothetical contract between STL and Mr Daniels was held to be one of employment.
The First tier tribunal (FTT) found that it was not:
- Whilst STL directed what Mr Daniels had to do during the shift it was no more than telling him what needed to be done on site by the contractors he supervised. This dictated the work done by everyone on site whether employed or self-employed. As his supervisor only visited the site occasionally STL did not exercise any more control than they would over an independent contractor.
- MDCM could not provide and STL was not required to accept, a substitute for Mr Daniels therefore the hypothetical contract was one of personal services, with no Right of substitution, and there was a Mutuality of obligation between STL and Mr Daniels.
- Although Mr Daniels bore the financial risk of the contract this was not a significant factor.
- He was not found to be part and parcel of the organisation of STL.
The FTT agreed that the requirement for personal services and lack of financial risk pointed to an employment relationship however, they found that the nature of the payment arrangements, a flat rate per day with no notice period and no entitlement to any employee benefits plus the fact Mr Daniels was not treated as an employee, were all inconsistent with employment. Under the hypothetical contract required by the Intermediaries Legislation Mr Daniels was not under an employment contract.
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