John Spencer provided specialist IT services to Allianz Cornhill Management Services through his company, JLJ Services Ltd.
He joined Allianz in May 2000 for an initial six-month project and remained there for more than seven years. During the first part of that period, Spencer worked under a series of relatively short contracts, usually linked to particular IT projects.
The arrangement changed at the end of 2003. Contract extensions became annual, individual projects were no longer specified and Allianz wanted to retain Spencer on a longer-term basis.
The First-tier Tribunal reached a split decision. Spencer was outside IR35 up to the end of 2003, but inside IR35 from the beginning of 2004 after the nature of his relationship with Allianz had changed.
IT work for Allianz
Spencer was an IT specialist whose expertise included Unix computer systems.
He worked through JLJ Services Ltd and obtained engagements through Highams Recruitment Ltd. Highams contracted with Allianz to supply his services.
Spencer already had a substantial contracting history before joining Allianz. Between 1994 and 2000, Highams found work for JLJ with six different end clients.
Some assignments lasted only three months and others up to 18 months. There were also periods of around three months when Spencer had no work between engagements.
After one of those gaps, Highams arranged an initial six-month assignment with Allianz at its Guildford offices beginning in May 2000.
Allianz needed someone quickly to take over Unix systems work from a specialist who was leaving. Spencer was appointed after a telephone interview so that he could start in time for the handover.
Short projects during the early years
The first Allianz assignment was described as an upgrade of its systems.
Until the end of 2003, most of Spencer’s subsequent contract extensions were also relatively short.
Apart from one ten-month period, the extensions ranged from one to four months. Most identified the particular project Spencer was expected to work on and, in many cases, the Allianz manager responsible for it.
Spencer was brought in for his specialist knowledge and used that expertise to complete the work required.
The tribunal looked at this against his earlier contracting history. JLJ had supplied Spencer to several different clients, individual assignments had ended and gaps without work had followed.
The tribunal found that Spencer’s position during these early Allianz projects was consistent with that of a specialist contract worker.
The arrangement changed at the end of 2003
The pattern was different from the beginning of 2004.
The short project-based extensions were replaced by contracts lasting an entire year. The extensions for 2004, 2005 and 2006 did not identify individual projects.
Allianz also wanted to retain Spencer on an indefinite basis at the end of 2003. There was some uncertainty in the evidence over whether he was formally offered employment as well, although Spencer was clear that he would not have accepted an employed position.
He continued working through JLJ under the annual contracts.
By then, Spencer was no longer being brought in simply to complete identified pieces of Unix work. He had become one of the people Allianz could call on when work arose within his specialist area.
The tribunal decided that this marked a genuine change in the relationship.
Control over Spencer’s work
Spencer had considerable technical expertise and Allianz managers could not tell him in detail how to carry out specialist Unix work.
During the early period, the work was tied to particular projects. Allianz decided what it wanted completed and the timescale, while Spencer applied his own expertise to the technical work.
That supported his contractor status.
The position became less clear when the project structure disappeared.
From 2004, Spencer was retained more generally and could be moved onto work which arose within the organisation. If an urgent problem appeared, he could be required to stop what he was doing and deal with it.
The tribunal considered that Allianz consequently had greater scope to direct Spencer’s activities even though it still lacked his specialist technical knowledge.
The distinction was not about somebody standing over Spencer and telling him how to operate a computer. It was about the work Allianz was entitled to require him to do.
Read more about control and IR35.
The substitution clause
The contracts contained a provision allowing JLJ to supply another suitably qualified person in Spencer’s place.
The right was restricted.
Any proposed substitute would have needed to satisfy Allianz that they had the necessary skills and would have been interviewed before being accepted.
JLJ also had no other employees available to replace Spencer, and no substitute was supplied during more than seven years at Allianz.
The tribunal accepted that substitution was theoretically possible if Spencer faced a lengthy absence and JLJ found someone suitable.
It gave the clause little weight when deciding his status.
For the work actually being carried out, Allianz expected Spencer to provide the services personally.
See our guide to substitution and IR35.
Working hours, holidays and employee benefits
JLJ invoiced Highams for the hours Spencer worked.
He received no holiday pay or sick pay from Allianz and had no pension rights or the other benefits available to its employees.
Spencer did not have a company car. If he used his own vehicle for Allianz business, the company did not reimburse his costs.
He also paid for his own meals, including his Christmas lunch.
There were no contractual rules dictating when he could take holiday. Spencer normally agreed his absences in advance as a courtesy and tried to avoid periods when his absence would disrupt project work.
The contracts could be terminated by either side on four weeks’ notice.
These differences remained in place throughout the engagement, including the later years which the tribunal found fell inside IR35.
Using Allianz equipment
Spencer carried out almost all of his work at Allianz’s premises and used its computer systems.
He could not connect his own laptop to those systems because of Allianz’s security requirements.
There was therefore an obvious reason why client equipment was used.
Spencer occasionally dealt with telephone calls at home and might download information onto his own laptop which could help with his work, but the substantive IT services were performed on Allianz’s systems.
Was JLJ in business on its own account?
Spencer’s contracting history was important to the tribunal’s view of the early period.
Before Allianz, JLJ had moved between a number of different clients and had suffered periods when no assignment was available. Spencer possessed a specialist skill which businesses might need for a particular project without wanting to employ someone permanently.
That description fitted the way the Allianz work initially operated.
By the later period, the position had changed. Spencer was working continuously for the same client under annual contracts and was no longer being retained for defined projects.
He was paid for the hours he worked and had little opportunity within the Allianz arrangement to increase JLJ’s profit by managing costs, using assistants or completing work more efficiently.
The tribunal found the later arrangement increasingly difficult to distinguish from employment.
Read more about being in business on your own account.
Mutuality of obligation
The tribunal also considered mutuality of obligation.
During Spencer’s earlier contracting career, engagements ended and periods without work followed. There was no expectation that one assignment would simply lead into the next.
The early Allianz contracts retained much of that character. They were short and generally attached to specific projects.
By the end of 2003, Allianz wanted Spencer’s services on an indefinite basis and the parties moved to annual contracts which Spencer continued to accept.
That provided further evidence of the change which the tribunal identified at the beginning of 2004.
The tribunal did not treat mutuality as a standalone test which decided the case. It looked instead at what the contracting pattern showed about the relationship between Spencer and Allianz.
Why Allianz used contractors
Allianz had another reason for using contract workers.
The tribunal heard that its German parent company imposed limits on the number of employees within the business.
Those restrictions gave Allianz an incentive to obtain some of the people it needed through contractor arrangements rather than increase its formal employee headcount.
The label attached to Spencer therefore carried little weight. His status had to be decided from the relationship which actually existed.
Why JLJ was outside IR35 before 2004
Spencer arrived at Allianz after years of moving between clients as a specialist IT contractor.
His first assignment was for six months and the extensions which followed were generally short. Most were linked to individual projects where Allianz needed his particular Unix expertise.
There had been gaps between previous engagements and no expectation that a client would retain him indefinitely.
Although Spencer worked at Allianz’s premises and used its systems, security requirements largely explained those arrangements.
He was not provided with holiday pay, sick pay, pension rights or the other benefits received by employees.
For the period up to the end of 2003, the tribunal found that the hypothetical relationship between Spencer and Allianz would not have been one of employment.
Chapter 8 therefore did not apply to those engagements.
Why the later contracts fell inside IR35
At the end of 2003, the pattern changed.
Allianz wanted to retain Spencer indefinitely and the parties moved away from a succession of short contracts linked to identifiable projects.
The new extensions covered whole years and did not specify individual pieces of work.
Spencer had become a key source of Unix expertise within Allianz. Rather than being engaged to complete a defined project and leave, he could be asked to deal with work as it arose.
The substitution clause carried little practical weight and the tribunal considered that the scope for Allianz to control what Spencer worked on had increased.
Several contractor features remained. Spencer was still paid through JLJ, received no employment benefits and continued to be described contractually as a non-employee.
They were not enough to preserve the earlier result once the underlying relationship had changed.
The tribunal found that from 1 January 2004 Spencer would have been an employee of Allianz under the hypothetical contract. The later engagements therefore fell within IR35.
A contractor’s status can change
JLJ Services is unusual because the same contractor, working through the same company for the same client, received different IR35 results at different stages of the relationship.
The tribunal drew the dividing line at the end of 2003.
Before then, Spencer’s work retained the features of the specialist project contracting he had carried out for years. Afterwards, Allianz retained him on annual contracts without tying his services to particular projects.
The paperwork still described him as a contractor.
What changed was the work Allianz expected Spencer to perform and the basis on which it expected him to remain available.
You can find JLJ Services alongside other contractor decisions in our complete guide to IR35 case law.
Judgment
The First-tier Tribunal released its decision on 28 November 2011.
JLJ Services Ltd v Revenue & Customs [2011] UKFTT 766 (TC), TC01603.
The case was heard by Tribunal Judge Howard M. Nowlan and Andrew Perrin FCA.
JLJ’s appeal was allowed in part. Spencer was outside IR35 before the end of 2003 and inside IR35 from the beginning of 2004.
Read the full JLJ Services decision.