Background
The intermediaries legislation (IR35) applies when an individual, typically a contractor, provides services through their personal service company to a client, where they could be considered an employee of the client. If IR35 applies, the intermediary must assess whether the worker would be considered an employee. If the contractor is deemed an employee, the fee payer must deduct income tax and National Insurance Contributions (NICs) from on the fees to be paid to the intermediary and account to HMRC.
In George Mantides Ltd v HMRC, the claimant, a doctor, provided services to two NHS hospitals through his personal service company. HMRC ruled that the payments made to the claimant for these services were subject to IR35, meaning that the fees should be treated as income, subject to tax and NICs. The claimant disagreed with this assessment and appealed.
The First-tier Tribunal (FTT) found in favour of the claimant regarding his contract with Medway Maritime Hospital, stating he would not have been regarded as an employee had he worked directly with the hospital. However, the FTT upheld HMRC’s decision for the Royal Berkshire Hospital contract, finding that the claimant would have been considered an employee. The claimant then appealed the decision regarding Royal Berkshire Hospital to the Upper Tribunal (UT).
Upper Tribunal decision
The UT upheld the overall conclusion reached by the FTT but remade its decision due to material errors in law. The UT determined that, had the claimant contracted directly with Royal Berkshire Hospital, the contract would have been one of employment under IR35. Therefore the UT rejected the claimant’s appeal and confirmed that the income received was liable for income tax and NICs.
The UT noted that the contracts at both hospitals were similar in nature. However, it was not appropriate for the FTT to rely on the Medway Maritime Hospital contract as a comparison point. Further, the UT found that the FTT had erred in the way it evaluated certain terms of the hypothetical contract. It found that the weight placed on the obligation to provide work and the one-week notice period was misplaced. While these elements may have had some influence, they were relatively weak indicators of self-employment, especially in short temporary engagements.
In reaching its decision, the UT concluded that the hypothetical Royal Berkshire contract would have required personal service and involved no right of substitution. It found there to be a sufficient degree of mutual obligation and control to indicate employment. Even with the FTT’s earlier errors were removed from the analysis, the contract retained the essential features of an employment relationship.
Comment
This case is a useful reminder that determining employment status for tax purposes remains complex and fact-sensitive. The IR35 rules generally apply when a worker provides services through an intermediary, such as a limited company, LLP, or partnership. For small private sector clients, the responsibility for determining the correct tax position falls on the worker’s company.
However, for public sector clients or medium/large private sector clients, the off-payroll working rules may apply. In these cases, the responsibility shifts to the client to assess the arrangement and, if needed, account for income tax and NICs.
This remains a complex area of law, and it is important to seek further advice to determine whether these rules apply and to ensure compliance.
For more information or advice, please contact Sian Knight-James in our Employment team on 020 7665 0800, or complete the form below.
