In Northern Light Solutions Ltd v HMRC [2021] UKUT134, the Upper Tribunal (UT) agreed that IR35 applied to a Personal Service Company (PSC). The control and mutuality tests were met and an obligation for personal performance made the right of substitution almost theoretical.

Robert Lee was a project manager for the Nationwide Building Society (NBS) through a Personal Service Company (PSC), Northern Lights Solutions Limited (NLS).

  • He worked for NBS over a seven-year period. He worked continually except for an annual 2-3 week ‘furlough’ period insisted on by NBS.
  • He was responsible for allocating tasks to the project team and for determining costs and timescales for delivering the project.
  • All work was subject to the governance standards of the Nationwide Change Framework.
  • The contracts were for a fixed term. He had to work fixed hours for a fixed day rate with no holiday or sick pay.
  • He had an unexercised right of substitution subject to Nationwide’s consent.
  • HMRC issued Income Tax determinations and NIC notices for three tax years.
  • The First Tier Tribunal (FTT) held that IR35 applied. Mr Lee was subject to overarching controls consistent with being a highly skilled employee. NLS appealed.

On appeal, the Upper Tribunal (UT) upheld the decision of the FTT.

  • Mutuality Of Obligation (MOO) should usually be confined to the question of whether a contract for work exists in return for payment. Until the contract is terminated there is clearly Mutuality Of Obligation in the sense of an obligation to pay for work done and an obligation to do the work provided. In this case, then there was MOO.
  • The correct way to approach the effect of a right of substitution is to apply the 'dominant feature' test.
    • The dominant feature of the right of substitution here was that of an obligation for personal performance by Mr Lee.
    • The FTT were right to conclude that it was difficult for Mr Lee to offer a substitute that NBS, acting reasonably, would accept, with the result that the right of substitution might be seen as almost theoretical.
  • The FTT was correct to conclude that NBS had a sufficient 'framework of control' to ensure that it controlled Mr Lee.
    • They had control of when Mr Lee worked; he was contractually required to work a 7.5 hour day.
    • They had control of where he worked. He could be required to work from a particular office, with some flexibility.
    • They had control over how work was done and had the power to overrule any worker, employee or contractor.

Useful guides on this topic

IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?

Personal Service Company (PSC) tax
What is a PSC?  What are the tax implications for a PSC?  PSC tax 

Off-Payroll Working: PSCs & Private Sector Engagers
What is Off-Payroll Working? Who does it apply to? What are the rules?

Employment Status: Mutuality Of Obligation
What is mutuality of obligation? What do the courts say?

Employment status & detailed checklist
An employer (including an Employment Agency) must assess any worker's employment status so that they can fulfil their obligations under employment and tax law.

External link

Northern Light Solutions v HMRC [2021] UKUT134 


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