Northern Light: Illuminating IR35

IR35, more properly the ‘intermediaries legislation’, recently turned 21. First announced in the eponymous press release, its first iteration became effective from 6 April 2000 and has become significantly more expansive in recent years. It is surprising, therefore, that many of the fundamental legal principles on which it relies remain so malleable. Although there are already a plethora of reported cases which provide some guidance, the majority of these cases are at First-Tier Tribunal (“FTT”) level and therefore do not create binding precedent. The recent decision of the Upper Tribunal (“UT”) in Northern Light Solutions Ltd v Revenue and Customs Comrs [2021] UKUT 0134 (TCC) is one of a number of new cases which demonstrate a consolidation of approaches.

Mr Robert Lee, the taxpayer, worked as a project manager on various specialist projects for the Nationwide Building Society (“NBS”). He was engaged under various similar contracts brokered by agencies over a number of years with his personal services company Northern Light Solutions Ltd. The practical arrangements will be familiar to many professional contractors and he enjoyed substantial freedom over how and when he worked. He could not be assigned to another project without his agreement. However, he was also subject to various security controls and governance standards expected in the financial services industry. Nonetheless, HMRC concluded that he fell within IR35.

As is usually the case, the sole issue before the FTT in 2020 was whether Mr Lee would have been considered an employee if he had provided services through a direct contract with NBS. This involves three stages of analysis, beginning with the interpretation of the “real contract” entered into between the parties. The second step is then to consider what the terms of a “hypothetical contract” with Mr Lee would have included. Finally, the third step is to consider whether the contract, as a matter of law, is one of employment under the long-established test in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497. Mr Lee lost in the FTT and appealed to the UT on various grounds but was also unsuccessful. On this occasion, however, the UT made important observations on two particular points which are worth highlighting.

The first point concerned the possibility of substitution. It has long been thought that a worker’s ability to substitute himself with another person was an important indicator that a contract was not one of employment. Although still important, there has been a more critical approach in recent cases which focuses on whether such a right is “fettered” by requiring the approval of the other party. Mr Lee had such a right under his contract to substitute another worker subject to the prior approval of NBS, although he had never actually exercised it in practice. The Tribunal drew on the “dominant features test” set out by the Supreme Court in Pimlico Plumbers Ltd v Smith [2018] UKSC 29 in a rather different employment law context to hold that, in view of the specialisation of his role, personal service was nonetheless a “dominant feature” of Mr Lee’s contract.

The second point, potentially more alarming for taxpayers, concerned control. Although skilled workers may be subject to a lower degree of control by their purported employer in their day-to-day work than their less skilled counterparts, it has often been an issue on which taxpayers have been able to make persuasive arguments about their status. Mr Lee did, at first sight, have a reasonable amount of autonomy about how and when he worked. In particular, he could not be re-assigned to other projects without his prior agreement. The Tribunal, however, placed emphasis on the general ‘framework of control’ over Mr Lee’s activities. In particular, it highlighted the fact that, as a worker in a closely regulated sector, he had been subject to the various governance and transparency standards as part of the ‘Nationwide Change Framework’. The fact that this and many of the more tangible controls over Mr Lee’s activities will have been largely security-motivated was given no obvious weight.

Overall, it is worth noting that Northern Lights is unusual among recent IR35 cases which have tended to focus on television and radio broadcasters. It may suggest that workers in regulated sectors­ - financial services, law, medicine, for example - may be particularly vulnerable to challenge under IR35.