Computer consultant Frank Simpson supplied his services to Better Investments plc through FS Consulting Ltd and recruitment agency Topper Recruitment.
HMRC decided the arrangements fell within the intermediaries legislation and that FS Consulting was liable for Class 1 National Insurance contributions. Four decisions covered the period from 6 April 2000 to 29 June 2001, starting on the day the new regulations took effect.
Simpson appealed against HMRC’s decision. He argued that Topper Recruitment’s presence between FS Consulting and Better should affect how the IR35 rules were applied, and that a direct contract with Better would not have made him an employee.
Neither argument succeeded.
Frank Simpson and FS Consulting
Simpson was a computer consultant specialising in conversion work. He had previously worked for a major bank, progressing from programmer to senior programmer and then team leader, before leaving in 1997.
FS Consulting Ltd was incorporated in July 1997, with Simpson as its sole director and shareholder. The company initially supplied his services through agencies to a building society, then to an insurance company.
After the insurance company sold its business, former colleagues recommended Simpson to Better Investments. He started there in December 1998 and continued to provide services to Better during the period covered by HMRC’s decisions.
Simpson worked through a recruitment agency
The contractual chain ran from Simpson to FS Consulting, then to Topper Recruitment and finally to Better. Better paid Topper for Simpson’s services, Topper retained its margin and paid FS Consulting, which in turn paid Simpson.
FS Consulting argued that the IR35 regulations should not take account of the whole chain because Topper was not itself the intermediary specified in the legislation.
Dr Nuala Brice, sitting as Special Commissioner, rejected that interpretation. The arrangements covered the parties involved in supplying Simpson’s services to Better; the agency did not disappear from the analysis simply because it did not meet the statutory definition of the intermediary.
The tribunal could therefore ask the central IR35 question: what would the position have been if Simpson had contracted directly with Better?
Better did not pay Simpson directly
FS Consulting also relied on the fact that Better paid Topper rather than Simpson.
That did not prevent a hypothetical direct contract from being constructed. The intermediaries rules required the Special Commissioner to consider what the terms would have been if the existing arrangements had instead taken the form of a contract between Simpson and Better.
The actual flow of money through Topper could not, by itself, prevent the legislation from applying.
The contract named Simpson personally
The agreement between Topper and FS Consulting named Simpson as the individual who would perform the consultancy work.
FS Consulting could propose somebody else, but any replacement needed Better’s approval. Simpson also had to work at the location specified in the contract, take necessary instructions from the client and comply with its rules, regulations and procedures.
That replacement provision did not give FS Consulting an unrestricted right of substitution. Better retained the right to approve anyone proposed in Simpson’s place, while the contract itself was written around Simpson personally providing the services.
A 37.5-hour working week
The working arrangements were also fairly structured. Simpson’s standard week was 37.5 hours and any absence had to be agreed with Better in advance.
He recorded his hours each week on Topper timesheets, while travel time and expenses remained FS Consulting’s responsibility.
Topper could normally terminate its agreement with FS Consulting on four weeks’ notice and could end it immediately in certain circumstances if Better terminated the corresponding agency agreement.
The written contract said expressly that it was not a contract of employment, but the Special Commissioner had to consider the substance of the arrangements rather than rely on that label.
How much control did Better have?
Simpson was a skilled and experienced consultant, so Better did not need to closely supervise the technical details of his work.
That did not mean Better had no control. Simpson worked within Better’s project structure, followed its procedures and worked the hours it expected. He also needed agreement before taking time off, so he was not simply free to come and go as he pleased.
Better did not supervise the technical detail of his work – he was an experienced specialist and was trusted to get on with it – but it still controlled the main framework of the engagement, including when he worked, where he worked and the procedures he had to follow.
Financial risk and equipment
There was little evidence of substantial financial risk in the Better engagement.
Simpson did not make a significant investment in equipment specifically to perform the work and was paid through the agency chain according to the hours recorded on his timesheets.
FS Consulting paid its own travel expenses, but Simpson was not exposed to the sort of commercial risk associated with quoting a fixed price for a project, correcting defective work at his own cost or making a loss because a job took longer than expected.
FS Consulting also relied on the 1978 agency rules
FS Consulting had one more argument. It said Simpson would not have been treated as an employed earner under the Social Security (Categorisation of Earners) Regulations 1978 because Better did not supervise, direct, or control how he carried out the technical work.
The factual point had some force. Simpson was an experienced computer specialist and Better largely left him to decide how the work should be done. But Dr Brice did not rule on whether the 1978 regulations would have applied.
The reason was procedural. HMRC’s decisions were made under the 2000 intermediaries regulations, not the 1978 rules. The argument would also have affected Topper and Simpson personally, yet neither was a party to FS Consulting’s appeal.
Dr Brice therefore left that issue undecided and dealt only with the NIC decisions before her.
Why FS Consulting lost
Once the agency structure was removed, the Special Commissioner found enough features in the relationship with Better to treat Simpson as an employee under the hypothetical direct contract.
He was required to provide his services personally, worked a standard 37.5-hour week, needed Better’s agreement for absences and worked under contractual terms requiring him to follow the client’s instructions and procedures.
His specialist skills meant he was trusted with the technical work, but that did not remove the other elements of Better’s control. He also carried little financial risk in the engagement.
FS Consulting’s appeal was dismissed, leaving the company liable for the Class 1 National Insurance contributions covered by HMRC’s four decisions.
An early test of the IR35 rules
The first of HMRC’s decisions started on 6 April 2000, the date the intermediaries regulations came into force, making FS Consulting one of the earliest reported tests of IR35.
The agency point is the most useful part of the decision today. Putting a recruitment business between the contractor’s company and the end client did not prevent the tribunal from reconstructing the contract between the individual worker and the client.
The hypothetical-contract issue soon appeared again in other early IR35 litigation, including Synaptek Ltd v Young.
The Special Commissioners, rather than a higher court, decided the FS Consulting dispute, so it does not carry the authority of later High Court and appellate IR35 judgments.
For more past cases, read our IR35 case law guide.
Decision
FS Consulting Ltd v McCaul (HM Inspector of Taxes) (2002) SpC 305.
Special Commissioner Dr Nuala Brice gave the decision on 22 January 2002.
Read the FS Consulting decision. (via vLex)