IR35 at Special Commissioners - The 'Battersby' Case
November 2001

Battersby v. Campbell (Inspector of Taxes) [2001]
Special Commissioner: Nuala Brice

This is the first decision of the Special Commissioners to be heard on the question of IR35. The contractor lost the case and was found to be employed for IR35 purposes. The case is not binding precedent but will no doubt be cited by the Revenue cite.

The appellant, Mr Eddie Battersby, is a computer analyst and programmer providing his services through E.B.Com Ltd of which he and his wife were directors. The appellant was 'self-employed' from 1988 and started working for Pennyright Bank from 1994. The contract ended some 7 years later in 2001 when the appellant became permanently employed by the Bank.

Although the clauses of the contract are not expressly stated in the case the following clauses are present:
  1. Under the consultancy agreement E.B.Com agreed to procure that the appellant would devote his time, attention, skill and ability in accordance with the requirements of Pennyright Bank at such location as Pennyright Bank might reasonably require.
  2. The agreement contained a special provision which stated: "This agreement does not create the relationship of employer/employee between the company [Staff Agency Limited] or client [Pennyright Bank] and the contractor [E.B.COM] or any of its personnel [the Appellant] ... ."
  3. E.B.Com also agreed to assign to Pennyright Bank all intellectual property or other rights created during the performance of the Appellant's services.
  4. There was no provision in the agreement for sickness, disability or pension payments and the appellant was not entitled to holiday pay, although any absence of the appellant had to be agreed and approved in advance by the Bank.
  5. The agency could end the agreement at any time on giving four weeks notice, it is not stated and only assumed that the appellant had no such equivalent right.
  6. The responsibility for quality, quantity and performance of the services rested with the Bank at all times.
  7. The normal hours of work were seven hours a day and payment was of an hourly rate with overtime pro rata.
  8. The appellant could have been substituted by another employee.
  9. If the Bank had complained about the appellant the agency would provide a replacement.
  10. The equipment used by the appellant was a mainframe computer system which was owned by the Bank and situated on the Bank's premises.
The facts were stated that the appellant worked in a large open plan office with 55 other people, some employees and some (assuming they are) self-employed. The appellant managed a small group of people, two of which were self-employed working on a project; reported to a personal manager employed by the Bank with regard to discussion of the project, meeting deadlines and any other related problems; and attended project meetings but did not attend other meetings arranged for permanent employees.

The appellant, who represented himself, appeared only to rely on the custom and practice of independent contractors in the computer industry and that he was not a "tax fraudster". He did not present any case law and argued that IR35 was more likely to apply to umbrella companies than his own. Unfortunately, not only has the appellant underestimated the value of professional legal assistance but, he has completely misunderstood the legislation with regard to the 5% rule.

Mr Williams for the Revenue argued that it was necessary to look at the substance of the arrangements rather than the form; and the substance was that the appellant was an employed earner.

Williams stated in argument that:
  1. the appellant had a personal obligation to the Bank;
  2. had been there for seven years;
  3. he was supervised by a personal manager;
  4. had been integrated into the structure of the bank;
  5. had not in practise substituted his services;
  6. was not at risk of bad debt; and
  7. had not called a witness from the Bank.
Williams cited the following cases:

Bank voor Handel en Scheepvaart N.V. v Administrator of Hungarian Property (1952) 35 TC 311;
Carmichael and another v National Power plc [1999] 4 All ER 897;
Express and Echo Publications Ltd v Tanton (1999) CA Transcript of 11 March 1999;
Hall v Lorimer [1994] STC 23
O'Kelly v Trust House Forte Plc [1984] QB 90; [1983] ICR 728;
O'Murphy v Hewlett-Packard Ltd [2001] Employment Tribunals Case 5300148/01 Transcript of 27 March 2001;
MacFarlane and Skivington v Glasgow City Council EAT/1277/99 Transcript of 17 May 2000;
McManus v Griffiths (1997) 70 TC 218
Market Investigations Ltd v Minister of Social Security [1968] 2 All E.R.732
Massey v Crown Life Insurance Co [1978] 2 All E.R. 576;
Morren v Swinton and Pendlebury Borough Council [1965]1 WLR 576;
Ready Mixed Concrete (South East), Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497; and
R (on the application of Professional Contractors Group Ltd and others) v Inland Revenue Commissioners [2001] STC 629.

Curiously Williams included the case of O'Murphy v. Hewlett Packard Ltd. The latter case was decided in the Employment Tribunal and O'Murphy was considered an employee for the purposes of unfair dismissal. The case had, however, recently been overturned by the Employment Appeal Tribunal. The curiosity was that the Revenue had made a statement regarding this case that it would not change its policy on status tests until such time as a test case reaches the Court of Appeal.

Even more curiously the Revenue used the case of Bank voor Handel en Scheepvaart N.V. v Administrator of Hungarian Property (1952) 35 TC 311. Firstly, they have cited the wrong case and this also appears in the Employment Status Manual

ESM1081 - Detailed Guide to determining status: part and parcel of the organisation
Another factor to be considered in determining status is whether a worker is 'part and parcel of the organisation'.

Denning LJ has said

'The test of being a servant does not rest nowadays on submission to orders. It depends on whether the person is part and parcel of the organisation.'

[Bank voor Handel en Scheepvaart NV v the Administrator of Hungarian Property 35TC311, page 333.]

The case they should be referring to is Bank voor Handel en Scheepvaart N.V. v. Slatford [1953] 1 QB 248 not only that but the case was reversed by the House of Lords. Secondly, just to add insult to injury, they also got the date of the Hungarian case wrong it was 1954 not 1952.

The Special Commissioner begins by stating that the question as to whether a person is employed under a contract of service, or whether he is self-employed and provides a contract for services, is a question of fact in each case to be determined having regard to all the relevant circumstances. This, I would submit, is incorrect. The question of whether the appellant is employed under a contract of service is a question of fact but, the determination of 'whether a contract of service or a contract for services' is a question of law.

The Special Commissioner proceeds to state only four cases of those cited by the Revenue. Ready Mixed Concrete; Market Investigations; Hall v. Lorimer; and McManus v. Griffiths.

In terms of the control factor it is well documented that it is not a decisive test and is of minor importance when dealing with a professional or skilled person. The provision of equipment was held not to be a factor in Lorimer; as long as the substitution clause is not a sham it cannot be discounted even if it is not utilised; payment by hourly rate is a neutral factor; I would suggest that when E.B.Com bought the appellant out of the contract from the agency to go direct at a cost of £5,460 that would be financial risk and profit from sound management; and as to whether the relationship had been established through permanency, the only case which purports that theory is Airfix Footwear Ltd v. Cope (1978) ICR 1210. This case was heard in the EAT and has since been heavily criticised for having no foundation.

The intention of the parties, which was expressly stated in the contract, was clearly that it was a contract for services.

The Special Commisioner held that : "Having considered all the relevant factors I conclude that those which point towards there being a contract of service outweigh the factors which point towards there being a contract for services. Concentrating on the substance of the contractual arrangements rather than their form, I therefore conclude that, if the Appellant had been employed under a contract with Pennyright Bank, he would be regarded as being gainfully employed under a contact of service."

The Commissioner continued: "My decision on the issue for determination in the appeal is that, if the arrangements had taken the form of a contract between the Appellant and Pennyright Bank, the Appellant would be regarded for the purposes of the 1992 Act as employed in employed earner's employment by Pennyright Bank."

The appeal is, therefore, dismissed.

An appeal to the High Court has to be on a question of law and that is either achieved by an error of law or by a decision of the Special Commissioner that is so perverse that no reasonable tribunal, properly informed, could have made it. I would say there is room for appeal on the latter.