Mark Fitzpatrick provided specialist engineering design services to Airbus through his company, MBF Design Services Ltd.
He worked on the A380 programme, producing design solutions and instrumentation work which had to fit into a highly controlled aircraft development process. Airbus set the project requirements and approved completed designs, but Fitzpatrick retained considerable independence over how he carried out the work.
HMRC argued that the engagements fell within IR35. MBF successfully appealed, with the First-tier Tribunal finding that the hypothetical relationship between Fitzpatrick and Airbus would have been one of self-employment.
Design work on the Airbus A380
Mark Fitzpatrick established MBF Design Services Ltd in 1996 after his previous employer ceased trading.
He was the company’s sole director and provided specialist engineering design services to Airbus through a contractual chain involving GED-Sitec Ltd and Morson Human Resources Ltd.
The appeals covered the tax years 2001/02 to 2006/07, although the issues left for the tribunal to decide related to 2003/04 and 2004/05.
Fitzpatrick’s work formed part of the Airbus A380 programme. He helped produce design solutions for components used in the aircraft’s flight-test instrumentation, including the equipment and connections needed to collect data during testing.
His work had to meet Airbus’s design requirements and the standards required by aviation authorities, but Fitzpatrick was an experienced specialist and was able to carry out his own research and decide how the technical work should be approached.
The contracts between MBF and GED described the assignment simply as “Designer”. MBF was paid an hourly rate, initially £21.47 for the first 35 hours each week and £22.34 for additional hours.
Fitzpatrick could turn work down
Airbus offered Fitzpatrick a number of projects during the period under enquiry, but he did not regard MBF as obliged to accept them.
In May 2004, Airbus asked him to take overall responsibility for the Flight Test Instrumentation on the A380. Fitzpatrick declined the work because the terms being offered were not good enough.
The tribunal regarded this as consistent with the way an independent contractor would deal with a client, rather than an employee being allocated another role.
MBF had also provided Fitzpatrick’s services to other end clients during its trading history and had to find new work when contracts came to an end.
This wider evidence formed part of the tribunal’s assessment of whether Fitzpatrick was genuinely in business on his own account.
Working hours and holidays
Fitzpatrick generally worked during hours which allowed him to coordinate with the Airbus employees and contractors involved in the same project.
His hours nevertheless varied according to the work that needed to be done. The tribunal did not accept HMRC’s argument that the arrangements amounted to a conventional 35-hour working week under Airbus’s control.
There were practical reasons for Fitzpatrick to be present at particular times. His designs formed part of a much larger engineering programme and had to be coordinated with work carried out elsewhere on the aircraft.
He also had freedom over his holidays. Fitzpatrick would take account of the project when deciding when to be away, but Airbus did not decide when he could take leave. If he was unavailable, another engineer could deal with the work.
That differed from the arrangements applying to Airbus employees.
Control over the engineering work
Airbus provided the design criteria which Fitzpatrick had to work within and his completed designs were subject to checking and approval.
The tribunal did not regard this as employment-style control.
Every element of the A380 had to fit with other parts of the aircraft and comply with aviation requirements. Checking and approving design work was therefore an unavoidable part of the project, whether the work was carried out by an employee or an independent specialist.
Fitzpatrick was largely responsible for deciding how to produce an acceptable design solution.
The tribunal found that the general supervision and direction exercised by Airbus did not amount to the degree of control characteristic of employment.
The position also differed from employment in other respects. Contractors were not subject to Airbus disciplinary or grievance procedures and could be required to correct defective work at their own expense.
Read more about control and IR35.
Substitution
The contractual arrangements did not require MBF to supply Fitzpatrick personally in every circumstance.
The MBF contract referred generally to “Operatives”, while other parts of the contractual chain also allowed services to be supplied without requiring one particular individual.
No substitute was actually used during the period covered by the appeal.
The tribunal nevertheless accepted evidence that a right of substitution existed and could have been exercised. The fact that Fitzpatrick himself carried out the work throughout the relevant engagements did not remove the contractual right.
This was one of several features of the arrangements pointing away from employment.
See our guide to substitution and IR35.
Airbus could stop using him
The contracts did not guarantee Fitzpatrick a continuing stream of work.
One agreement provided for seven days’ notice, while another contractual provision allowed work to be cancelled without notice.
The tribunal regarded the ability to end the requirement for a contractor immediately as difficult to reconcile with an ordinary employment relationship.
There were also occasions when Airbus’s computer systems failed and contractors could not work.
Fitzpatrick and the other contractors were sent home without pay, while Airbus employees remained at work.
MBF was only paid for work actually carried out, and Airbus was not obliged to continue providing Fitzpatrick with packages of work.
The tribunal considered these arrangements when examining mutuality of obligation.
Financial risk and defective work
MBF carried a number of costs and risks which did not apply to Airbus employees.
The contracts required MBF to ensure that those supplying the services were properly trained and qualified at the company’s expense.
With one exception involving software specific to Airbus’s own systems, Fitzpatrick paid for his own training.
MBF could also be required to rectify defective work at its own cost. If Airbus rejected a piece of work, payment could be withheld until the problem was corrected.
The company was required to maintain insurance and also carried the normal risk of invoices not being paid.
These arrangements meant that MBF’s income depended on the work available, the rates it negotiated and the quality of the service it provided.
Using Airbus equipment
Fitzpatrick carried out the engineering work at Airbus and used the client’s equipment.
HMRC relied on this as one of the factors pointing towards employment.
The tribunal gave it little weight in the circumstances of the case.
The A380 design work depended on Airbus’s specialist systems, technical information and engineering infrastructure. Performing the work elsewhere or using Fitzpatrick’s own equipment would not have been a realistic alternative.
The fact that Airbus supplied the equipment therefore said little about whether Fitzpatrick was an employee or an independent contractor.
The same applied to the requirement to work at the Airbus site.
Different from Airbus employees
Fitzpatrick did not receive the benefits available to Airbus employees.
There was no sick pay, holiday pay, pension entitlement or healthcare provision through Airbus. He was not covered by the company’s disciplinary and grievance procedures and did not participate in the same employee arrangements.
His security pass also identified him as a contractor.
The tribunal found that Fitzpatrick was only integrated into the Airbus organisation to the limited extent required to perform his project work.
He worked alongside employees and other contractors, but he did not hold an Airbus position or follow an employee career structure.
Why MBF Design Services won
The tribunal considered the arrangements which existed between MBF, the intermediaries and Airbus before constructing the hypothetical contract between Fitzpatrick and Airbus.
Fitzpatrick was an established freelance engineering specialist working through a company which had traded since 1996. He negotiated rates for new work, could refuse projects and was not guaranteed continuing work from Airbus.
The technical checking of his designs did not amount to employment-style control, while the project environment explained why he worked on Airbus’s premises and used its equipment.
MBF paid for training, could bear the cost of correcting defective work and invoiced for the services Fitzpatrick provided. Contractors could also be sent home without pay when there was no work they could perform.
The tribunal found that Fitzpatrick was not part and parcel of Airbus’s organisation beyond the temporary and limited involvement needed to carry out the projects.
Looking at the arrangements as a whole, the First-tier Tribunal concluded that the hypothetical contract between Fitzpatrick and Airbus would have been a contract for services rather than a contract of employment.
MBF’s appeals were allowed.
The result can be compared with Marlen Ltd v HMRC, decided later the same year, where another engineering contractor successfully challenged HMRC after the tribunal found insufficient control and mutuality of obligation.
It also provides a useful contrast with Larkstar Data Ltd v HMRC, where the contractor’s specialist expertise did not prevent the wider evidence on control from supporting an inside-IR35 finding.
Judgment
The First-tier Tribunal released its decision on 5 January 2011.
MBF Design Services Ltd v Revenue & Customs [2011] UKFTT 35 (TC), TC00912.
The case was heard by Judge Malachy Cornwell-Kelly and Christopher Perry C.Eng.