IR35: Court Rules – Contractors Are Innocent until Proved Guilty Over Substitution

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Crucial Ruling

Perhaps the most crucial ruling in the case of Lime-IT and Lisa Fernley versus the Inland Revenue was that it had to be taken in good faith that the contractor would provide a substitute, as stated in the contract, if there was a need for it.

The client, in this case Marconi, had the right to refuse any substitute, according to the details of the contract.

This means that for this clause to kick in that, first of all, a contractor is no longer able to perform the tasks stated in the contract, which is unusual in itself.

Even if this happens, the client has a right to refuse the substitute.

Only in the Breach

The only way that the contractor could be found to be outside IR35, seemingly according to this, is if the contractor could no longer do the work, that the client wanted a substitute and the contractor either couldn‘t or wouldn‘t supply one.

It is only in the breach that the Inland Revenue could prove that the contractor had no intention of supplying, or couldn‘t supply, a substitute.

Otherwise, according to the Special Commissioner, unless there was evidence to the contrary, the substitution clause in the contract had to be taken in good faith.

His Verdict

The Commissioner stated:-

‘Although the right was never exercised it is not a provision which can be described as a sham. It was negotiated specifically at the Appellant’s request. Although I did not have any evidence from Marconi there is no reason to suppose that they would not have been willing to pay the same rate for a substitute of ‘Equivalent expertise’ as the contract requires’.

‘Indeed it was very much in their interests that the Appellant would provide a free overlap period to inform the substitute about the state of the work. It seems to me that in the hypothetical contract with Miss Fernley, Marconi must be taken to have the benefit and burden of this provision’.

‘It is a strong indication of self-employment. Indeed in Express and Echo Publications Ltd v. Tanton (unreported 11 March 1999) the Court of Appeal held that where a person is not required to perform the work personally, as a matter of law the relationship could not be one of employment:

“”‘¦it is, in my judgment, established on the authorities that where, as here, a person who works for another is not required to perform his services personally, then as a matter of law the relationship between the worker and the person for whom he works is not that of employee and employer.””

Your Burden of Proof Guys

Therefore, the Inland Revenue have the burden of proof on them to prove that the substitution clause was a sham, and the only likely way for them to be able to do that is if the substitution clause was in breach. It has to be assumed that the contract and its substitution clause is in good faith unless there is evidence to the contrary.

The Inland Revenue (and the Government ministers) must be gnashing their teeth at this one, but it has always been part of British law that you have to prove bad intent. The Revenue and the Government has the burden of proof – and that is going to be a huge barrier to them.

Game Over

And as the Commissioner said, that in Case Law that ‘where a person is not required to perform the work personally, as a matter of law the relationship could not be one of employment‘.

Checkmate.

Games, Set and Match to Lisa Fernley, the PCG and all contractors in general.

If the PCG Lobbying team were having breakfast this morning with Paymaster General Dawn Primarolo (as they did at the Labour Party Conference), then they might have had to help her with some water as she choked on her poached egg and toast.

Gordon Brown may be finding another headache element to his tax shortfall this year.

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