IR35: Lime-IT – Bloody Nose for the Inland Revenue



An IR35 case won by the tax payer on 2 October looks like having repercussions throughout the contracting industry.

In what will now go down in history as the Lime-IT case. The facts were as follows:-

Lime-IT was formed in April 2000 by Miss Lisa Fernley who was the sole shareholder and Director. Shortly after, an agency secured a contract with Marconi and the issue was that if Lime-IT and the agency had not existed would Miss Fernley have been regarded as an employee of Marconi.

So,— we have a typical IR35 scenario and typically the Inland Revenue immediately gave the opinion that the contract fell within IR35 without bothering unduly to look at the facts.

Specific Projects

The work was for a number of specific projects i.e. organising and managing a computer support function, introducing a new email system, organising remote access and also changing to Windows 2000.

It was estimated that this would take one year to complete, that Miss Fernley would be the only employee and that she would work an estimated 37 hours at an hourly rate each week. The contract would end once the projects were completed.

However, Miss Fernley negotiated a ‘˜Right of Substitution‘ clause and the contract provided that in the event that this clause came into effect, an overlap period of up to 10 working days would be provided so that the substitute fully understood the requirements of Marconi. During this overlap period Marconi would not be invoiced additionally for the substitute.

Not Bothered About Agency Contract

The Special Commissioners who heard the case did not seem too bothered by the terms of the contract between the agency and Marconi which was only seen by Miss Fernley at a later date but were clearly impressed with the substitution clause which also gave Marconi the right to refuse to accept the substitute on ‘˜reasonable grounds‘.

Miss Fernley worked partly from an office that she had set up at her home and partly at Marconi‘s offices and Lime-IT paid for the travelling expenses. She reported progress on an informal basis to the IT Manager but did not work alongside Marconi employees and none of them had her specific expertise.

She was not controlled by Marconi and her work pattern varied from nothing in one week to more than 50 hours in another with considerable fluctuations. The Special Commissioners accepted that she did what was required to get the job done.

Contractor Badge

Other points of importance were that she had a security pass which had ‘˜Contractor‘ on it and it was a different colour from those of the employees. She did not benefit from Marconi‘s employee benefits but she was listed in the internal telephone directory and did have an email address there.

She purchased a lap-top computer especially for the job and invoiced Marconi on a monthly basis. In fact at the end of the contract there were two overdue invoices and she threatened to sue for payment of them.

Tried and Tested Criteria

The Special Commissioners then looked at the usual tests which determine whether a person is self employed or not and they quoted several leading cases on the subject. They related to control, the financial risk and ability to profit, provision of equipment, right of substitution, basis of payment, intention of the parties,— in fact all the tried and tested criteria which have been applied for many years.

It was all summed up at the end with the comment ‘looking at all the factors there is very little to suggest an employment relationship. In essence Marconi was contracting for a particular IT job from a small business in the way one would expect an IT Consultant to be engaged’.

‘In my view on the hypothesis that Miss Fernley had contracted directly with Marconi she would not have been employed under a contract of service, she would have been in business on her own account’.

Lime-IT was represented by Accountax who are probably still celebrating this notable victory.

So,— what will the Inland Revenue do now?!

Gordon Morrison
[email protected] Telephone 020 7730 8995
Wheawill & Sudworth
Chartered Accountants & Registered Auditors

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