The Special Commissioners’ decision in the case of Datagate Services Limited v The Commissioners for Her Majesty’s Revenue & Customs went in the contractor’s favor.

The fourth ever IR35 victory for a contractor at this level, this is undoubtedly a significant result drawing considerable attention for breaking the jinx of four successive losses, most recently experienced in the Island Consultants case which was lost at the end of last year.

Findings of Fact

During the course of the two day hearing the Special Commissioner, Mr Adrian Shipwright, heard evidence from the contractor Mr Bret Barnett of Datagate Services Limited, Mr Simon Wycherley of MBDA (the end-client) and Ms Nicole Hartland, also of MBDA pointed out the following observations in Findings Of Fact:

• Datagate had entered into a contract with the agency (latterly Technology Project Services International Limited (TPS)) for supply of services to MBDA. TPS was into an arrangement with MBDA for the supply of services.

• The contract excluded an employment relationship as well as contained features that are not found in an employment context.

• The Special Commissioner specified clauses in the contract of material importance in relation to the issue of intention and, most importantly, Datagate’s right to provide services to other parties during the currency of the engagement.

• Datagate was paid by the hour plus VAT

• As in the case of Ansell Computer Services v. David Richardson (HMIT) (SpC 425) (2004) the work had to be carried out by a particular person primarily for security reasons.
• A right to substitute existed subject to security clearance, but this right was not exercised.
• There was no provision specifying a minimum number of hours.
• Mr Barnett could exercise his discretion on when to work and discussed time off with the team leader as a matter of courtesy.
• Mr Barnett worked with the relevant team but was provided with ‘discrete sections of work’, namely projects to work on.
• MBDA wished to learn from him.

Independent Services

The Special Commissioner then reached the conclusion that Mr Barnett’s relationship with MBDA ‘was that of a professional consultant providing independent services when looked at as a whole’. The Special Commissioner also alluded to the well known factors set out in the Revenue’s Employment Status Manual.

HMRC Arguments Dismissed

The Special Commissioner also investigated whether there was an ultimate right of control by MBDA over Mr Barnett. However, the Special Commissioner took note of the strong security requirement as the projects concerned were defence-related and concluded that any right of control was not akin to that expected of employment.

Similarly, the Special Commissioner dismissed HMRC’s argument that provision of equipment by MBDA was indicative of employment within the security context. At the hearing the Special Commissioner said it bore a strong similarity to the Ansell case.

Illogical HMRC Arguments

During the hearing Mr Michael Faulkner for HMRC argued that a right of control existed over Mr Barnett in terms of the hours to be worked. During the hearing Mr Michael Faulkner for HMRC further argued that Datagate was not exposed to significant financial risk, while the Special Commissioner found the line of argument flawed.

It led the Special Commissioner to conclude that Datagate would lose its main source of income if the contract was terminated, which demonstrated financial risk of a greater degree than is expected in a relationship of employment.

No Right of Control

Mr Barnett gave compelling supportive evidence that MBDA did not have a right of control as to when the work was done. The Special Commissioner conceded that Mr Barnett was able to organise his work to gain more free time rather than to profit monetarily from servicing other clients concurrently. 

Mutuality of Obligation

Although the decision does not particularly address the fundamental issue of mutuality of obligations, the Special Commissioner convincingly said that Datagate was entitled to payment for work done and since the work was project based, it would not be integrated into the end-client’s business.

It is of extreme importance to understand that the contract with the agency TPS defined the work to be completed and did not in any way place an obligation on TPS or MBDA to provide work to Datagate and Mr Barnett during the currency of the agreement or after termination of the services.

This emphasized the importance of defining the work as a discrete project at the outset and the importance of which has consistently been highlighted by Lawspeed from the inception of IR35.

Right of Substitution

The Special Commissioner also acknowledged the fact that Datagate had a right to substitute and engage helpers.

Not a Contract of Employment

In addition, the Special Commissioner disagreed with HMRC’s argument that the existence of a right to terminate a contract is akin to a right to give notice under a contract of employment.

Intention of the Parties

The intention of the parties which is relevant only in borderline cases, was also taken into account even though the IR35 legislation necessitates assessing only the hypothetical contract between the worker and the end-client.

Very Welcome

At the hearing, it became obvious that the evidence of Ms Nicole Hartland on behalf of MBDA was based on a document concerning employment at MBDA and did not divulge information on Mr Barnett’s specific working arrangements as a contractor.

Welcome Reassurance to Contractors

The sweeping victory has brought back a sense of confidence among contractors, after the disappointing result in Island Consultants.

Martyn Valentine, who handled the case with James May at Lawspeed said, “in conclusion, this decision has many interesting aspects, particularly the Special Commissioner’s application of Ansell….……. This illustrates yet again the importance of ensuring that the true working arrangements are reflected in the contractual documents and that the work is set out as a discrete project to minimize the key factors of control and mutuality of obligations, and to distinguish the contractor’s work from the end-client’s business.”
 
This decision is a welcome reassurance to contractors that it is possible to operate outside the IR35 legislation provided they ensure that working practices are sound and well documented