Employment Status of Contractors – Special Commissioner considers the “notional contract”Monday, May 26th, 2008
In a decision given on 2 May 2008 in the case MKM Computing Ltd v Revenue & Customs, the Special Commissioner upheld an HMRC decision that Mr. Ellwood, sole director of MKM Computing (MKM), would have been an employee of London General Holdings (LGH) if his contract had been made directly with LGH.
The case fell within the “IR35” provisions of the Income Tax (Earnings and Pensions) Act 2003. Mr. Ellwood was supplied his company MKM to provide IT services to LGH under a contract between MKM and LGH, not between Mr. Ellwood personally and LGH. The “IR35” legislation provides that Mr. Ellwood would be liable for PAYE tax and NICs if the terms of the contract were such that, if he had contracted directly with LGH, LGH would have been obliged to treat him, for tax and NICs purposes, as an employee instead of an agency contractor.
HMRC had decided that Mr. Ellwood would have been an employee is this specific situation and assessed him for over £27,000 in tax and NICs. Mr. Ellwood appealed to the Special Commissioner.
The Special Commissioner upheld HMRC’s assessment after reviewing in some detail the various factors that must be considered in deciding whether the nature of the working rela-tionship between a contractor and the business for which the contractor’s services are pro-vided constitutes “employment”. Readers who are interested in these issues will find it help-ful to read through the decision in detail.
However, an interesting feature of the decision was the way in which the Special Commis-sioner approached his examination of Mr. Ellwood’s working relationship with LGH. The tax legislation provides that the “IR35” rules apply if “the circumstances are such that, if the ser-vices were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client”. It then states that such circumstances “include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are pro-vided.” As a result, in his decision, the Special Commissioner constructed a hypothetical or notional contract, deriving its terms and conditions from the actual way in which Mr. Ell-wood’s work was performed, and then “standing back and looking at the whole picture”. On balance, the Special Commissioner decided that, if the notional contract had actually existed, Mr. Ellwood would be been an employee of LGH.
MKM Computing Ltd v Revenue & Customs