Mark Fitzpatrick supplied his design services to Airbus through “MBF Design Services”, but was he in reality an employee for PAYE purposes? Jenny Wotherspoon reports the decision on appeal in Mark’s favour.
What: Tax treatment of consultants
When: January 2011
Law stated as at: 1 April 2011
The First-tier Tribunal decision in MBF Design Services Ltd v HMRC  highlights the wide variety of considerations that are taken into account when establishing whether an employment relationship exists under the current tax rules. The decision is helpful as it provides insight into the weight accorded by the Tribunal to different factual elements of a case when determining whether an employment relationship exists.
It is common for consultants to provide their services through an intermediary (such as a personal service company) to client organisations. This presents tax benefits as the consultant may not be regarded as an "employee" of the client, meaning that normal Income Tax and National Insurance Contributions are not required in respect of their earnings.
Under specific tax rules (known as "IR35" rules) HMRC is able to "lift the veil" on this type of arrangement to determine whether the nature of the "real" relationship between the individual and the client organisation constitutes an employment relationship. If such an employment relationship exists, the intermediary is required to make normal PAYE deductions in respect of the consultant's earnings. If the consultant provides his services directly to the client without using an intermediary company, then the client may be held liable for such PAYE deductions.
The elements that are used to establish an employment relationship under the IR35 rules are notoriously vague and, above all, always dependent on the facts and circumstances surrounding the case.
Mr Fitzpatrick was a designer for the aviation industry and the sole director of MBF Design Services Limited ("MBF"). He was providing services to Airbus by working through MBF and a chain of agency agreements. MBF had appealed against a decision by HMRC that Mr Fitzpatrick was an employee of Airbus for the purposes of Income Tax and National Insurance Contributions and that MBF ought to have made PAYE deductions in respect of his earnings.
Mr Fitzpatrick mostly worked at Airbus's premises. He worked as part of a large team. He did not work set days or hours, but was required to keep time records for billing purposes and worked on average a 40 hour week. His work was not supervised but occasionally Airbus officials would check that the work being performed conformed to the specifications of the overall project. If there were any errors in the work that Mr Fitzpatrick performed, then corrective work to a design had to be undertaken at the time and expense of the MBF. Further, when Mr Fitzpatrick was unable to work due to technical difficulties experienced by Airbus, MBF was not paid. Mr Fitzpatrick was not subject to Airbus' disciplinarily and grievance procedures and was not invited to "employee" events.
The Tribunal upheld MBF's appeal. It found that there was no required PAYE as Mr Fitzpatrick was not an employee of Airbus for tax purposes. In its reasoning, it separated out the different contractual elements of the arrangement between those that pointed away from employment, and those that pointed to employment. It also considered the practical considerations that could point either way depending on circumstances.
Contractual Elements which point away from employment
The Tribunal found that the terms of the different agency agreements though which Mr Fitzpatrick's services were provided pointed away from an employment relationship. It highlighted in particular the following terms as being inconsistent with the notion of employment:
- Airbus had no obligation to provide any work to the intermediary
- Airbus could cancel the contract without notice
- Any breaches had to be remedied by the intermediary
- The contracted worker's position was uncertain; they have no role or line of duty within the organisation
Contractual Elements which point to employment
The Tribunal was of the opinion that the above elements outweighed factors within the contractual terms which would otherwise point to employment, such as:
- payment by the hour
- time recording
- quality standard approvals
- site working; and
- all intellectual property created and information involved vesting in Airbus.
Practical considerations which could point either way depending on circumstances
The Tribunal iterated that certain practical realities could be interpreted either way in determining whether an employment relationship exists. These include:
- whether Mr Fitzpatrick did in fact send or could have sent a substitute to provide the services,
- the checking and approval of work by Airbus,
- the allocation and coordination of work by Airbus's management,
- the negotiation by MBF of Mr Fitzpatrick's wages at different stages,
- the fact that Mr Fitzpatrick worked closely with Airbus employees,
- the fact that the work was on site; and
- that the number of hours were similar from one week to another.
The Tribunal analysed each of these considerations and deduced that Mr Fitzpatrick was not "'part and parcel' of Airbus's organisation in any but the most temporary and limited sense".
Why this matters:
This case sheds some light on the weight that a Tribunal might accord to different factors in determining whether or not a person is an employee for the purposes of Income Tax and NIC contributions. The Tribunal's separation of factors into categories (those that point away from employment, those that point to employment and those that could point to or away from employment depending on the circumstances) provides a useful reference. However, what the case highlights above all is that it can still be difficult to apply IR35 rules. Each case has to be evaluated on its facts; there is no "magic formula" to guide consultancy arrangements and advice should always be sought when there is any doubt about a consultant's status.
Case reference: MBF Design Services Ltd v HMRC  UKFTT 35
Osborne Clarke, London
Osborne Clarke, London