Ian Hough provided business and data analysis services to Severn Trent Water through his company, Island Consultants Ltd.
He worked on Severn Trent’s large Target billing-system project for several years, usually under contracts lasting three months at a time.
Severn Trent brought Hough in because it needed skills it did not have in-house, so he was largely left to do the technical work himself. Despite this, HMRC took the view that the engagement fell within IR35.
Island Consultants appealed, but the Special Commissioner found that Hough would have been an employee of Severn Trent Water if he had contracted directly with it.
Business analysis for Severn Trent
Hough joined Severn Trent’s Target project in 1998. The programme involved replacing the company’s billing system for around three million customers.
His work covered business and data analysis and required specialist knowledge. Severn Trent did not employ anybody with equivalent experience, so Hough was largely left to decide how the detailed work should be carried out.
The tax dispute covered PAYE for 2000/01 to 2002/03 and National Insurance contributions from 6 April 2000 to 5 April 2003.
Three-month contracts for a project lasting years
Island Consultants never had a single long-term agreement covering Hough’s time at Severn Trent. Instead, the work was broken up into a series of shorter contracts, usually lasting three months and sometimes six.
When one contract ended, there was no automatic right to another. Severn Trent was free to stop offering work, and Hough was free to walk away; some renewals were agreed only shortly before the previous contract expired.
That meant each contract genuinely ended before the next one began. Even so, Hough kept returning to the same Target project and ended up working there for several years.
The case therefore contrasts the length of an individual contract with the length of the working relationship itself.
Read more in our dedicated guide to contract length and IR35.
Which Severn Trent company was the client?
The entities involved in the contract chain changed during the period under appeal.
Island Consultants contracted with recruitment agency Spring Ltd. Until October 2001, Spring contracted with Severn Trent Systems. After that, Spring contracted directly with Severn Trent Water.
The tribunal first had to decide which Severn Trent company Hough was really working for.
Dr John F Avery Jones found that it was Severn Trent Water. That was the company using Hough’s services and running the Target project.
Little control over the technical work
Severn Trent did not tell Hough how to carry out the analysis. They brought him in because he knew the work, and he was largely left to get on with it.
There was no close technical supervision and no attempt to dictate how he should do the job.
Severn Trent still controlled the practical setup around the work. It decided what the Target project needed, where Hough would work and how his role fitted with the rest of the team.
Hough also met project manager Robert Carson regularly to go through progress and worked alongside the other people on the programme.
Dr Avery Jones found this amounted to a sufficient level of control exercised by the client, even though Severn Trent did not tell Hough how to perform the technical work.
Working inside the Target team
Hough spent much of his working time at Severn Trent’s premises and had a desk, computer, parking facilities and access to the staff canteen.
He worked alongside Severn Trent employees and other people engaged on Target rather than delivering a separate piece of work away from the client’s organisation.
Those arrangements were relevant when the question of integration was considered. Hough had become closely involved in the project’s operation over a number of years.
That did not automatically make him an ’employee’, but the level of integration into the client’s organisation counted against Island Consultants when the relationship was considered as a whole.
No genuine free right to provide a substitute
The contracts allowed for a replacement in theory, but Hough could not simply send another consultant in his place if he was unavailable.
Severn Trent still had to accept the person put forward, which meant the client retained the final say. That mattered because Hough had been brought onto the Target project for his own specialist knowledge rather than as one interchangeable member of a wider consultancy team.
Dr Avery Jones therefore found that the arrangement still depended on Hough providing the services himself.
Read more in our guide to the right of substitution for how tribunals distinguish a genuine replacement right from contractual wording which may promise a right that cannot be exercised in practice.
No promise of another contract
Island Consultants had a stronger argument when it came to what happened between contracts.
Once one agreement ended, Severn Trent did not have to offer another, and Hough did not have to accept further work.
Therefore, no continuing obligation existed between the separate engagements.
During each contract, however, Hough agreed to provide the services and Severn Trent agreed to pay for them. The Special Commissioner found enough mutuality of obligation within each engagement for the employment-status question to arise.
Other differences from Severn Trent employees
Hough did not receive holiday pay, sick pay or the other benefits available to Severn Trent employees.
The written agreements also described the arrangement as one for consultancy services rather than employment.
Those points favoured Island Consultants, as did Hough’s freedom over the technical work. They were not enough to outweigh the rest of the arrangement.
Why Island Consultants lost the case
Hough had been brought in for specialist work and Severn Trent largely left him to decide how that work should be done. He also worked under a series of short contracts rather than one long agreement.
The problem for Island Consultants was what the relationship looked like over time. Hough stayed on the same project for years, Severn Trent expected him to do the work himself, and he became closely involved in the Target team. Severn Trent also decided where he worked, what the project needed from him and how his role fitted with the rest of the programme.
Dr Avery Jones concluded that Hough would have been an employee of Severn Trent Water if he had contracted with it directly.
Island Consultants’ appeal was dismissed.
A useful comparison with other early IR35 cases
This case shows that having technical independence does not necessarily mean that a contractor’s work falls outside IR35.
A skilled contractor may be left alone to decide how specialist work is carried out while the client still controls enough of the wider engagement to support employment status.
You can compare this result with Marlen Ltd v HMRC, where Gary Hughes also worked for years on client projects but had much greater freedom over his hours, holidays and working arrangements.
You can also compare First Word Software Ltd and Datagate Services Ltd, two other early contractor cases which produced outside-IR35 results.
Read our complete IR35 case law guide for the wider line of decisions.
Judgment
Island Consultants Ltd v Revenue & Customs [2007] UKSPC SPC00618.
Special Commissioner Dr John F Avery Jones CBE released the decision on 5 July 2007.