IR35 Case: MBF Design Services Ltd v HMRC [2011] UKFTT 35

    Background

    Accountax Consulting successfully defended MBF Design Services Ltd (MBF) against IR35.  This case was heard in November 2010 by presiding Judge Cornwell Kelly.
     
    HMRC had commenced their enquiry back in December 2004, with Notices finally being raised in February 2009.
     
    Even then there was an astounding lack of attention to detail by HMRC who raised Notices for the tax years 2001/2002 to 2006/2007 inclusively, despite the fact is was well established that the engagement under review covered the period April 2003 to August 2005.
     
    This highlights the importance, in our role as advisers to our clients, to check such Notices rather than to assume HMRC have done their homework when raising Notices.
     
    MBF has provided design engineering services to its various clients since it was formed in 1996, via its director/shareholder Mark Fitzpatrick.
     

    Facts

    The engagement under appeal involved MBF producing design solutions for specific project based components on the A380 aircraft to Airbus, via GED Sitec (second tier agency) and Morson Human Resources (first tier agency).
     
    In constructing the hypothetical contract, it required ascertaining whether the engagement entered into over a series of contracts was subject to the IR35 legislation. There were three contracts that needed to be taken into account, as well as the witness evidence.
     
    These were the contracts between MBF and GED Sitec, between GED Sitec and Morson, and between Morson and Airbus.
     
    Neither of the lower level contracts named Mr Fitzpatrick, stating that there was no obligation to provide any particular individual.  Between Morson and Airbus, Mr Fitzpatrick’s name appeared on various Purchase Orders along with more than 40 others.
     
    MBF had written witness statements from Mark Fitzpatrick, another contractor who had worked on the same project, a former employee of Airbus who worked on the same project who has since become a contractor, and his main liaison at Airbus during the project, one of the team leaders, an employee of Airbus.
     
    At the time of the hearing the team leader had work commitments in France and was unable to attend the hearing.  As he was not available to be cross examined HMRC objected to his statement being admitted into evidence.
     
    While the Judge decided not to admit the team leader’s witness statement into evidence, HMRC’s objection somewhat back fired on them, as the Tribunal decided not to admit any written evidence where the individual was not there to be cross examined. HMRC’s case relied heavily on statements made by another Airbus employee whose correspondence was within the bundles of documents, but which HMRC would not be able to bring into evidence.
     
    The oral evidence from the Appellant’s three witnesses portrayed a classic picture of an independent consultant working on discrete parts of a project within a large organisation. As long as he got the job done Mark could pretty much come and go as he pleased, he did not ask permission for time off, paid for his own training and was not subject to employee controls or procedures; and on a couple of occasions he and the other contractors had been sent home without work or pay when the computer system has crashed.
     
    The evidence from the Appellant’s witnesses was not disturbed by the evidence of HMRC’s witness, another team leader on the Airbus A380 project.
     

    Approach

    As in all IR35 cases, in seeking to create a hypothetical contract between Mr Fitzpatrick and the End Client, the Tribunal considered the case law, together with the submissions of the parties relating to the relevant factors; referred to as the two stage exercise in Tilbury Consulting Ltd.
     
    In determining the hypothetical contract the Tribunal took the following factors as guidelines from the considerable case law on this subject:
     

    • Contractual terms
    • Personal Service
    • Mutuality of obligations
    • Control
    • In business on own account
    • Intention of the parties
    • ‚ÄčOverall view


    Conclusion

    The Tribunal was of the overall impression that the arrangements were typical of a contract for services and considered there were many factors which lead them to this conclusion.
     
    In particular the Tribunal noted the lack of mutuality of obligations citing the ability to cancel the contract without notice and the fact that there had been occasions where due to computer failure, contractors were sent home without pay whereas employees had to remain on-site.
     
    The Tribunal further concluded there was insufficient control to demonstrate a contract of service, saying that the checking and approval of design work was an inevitable necessity of the project and would have had to be present in respect of any work done for the End Client. 
     
    To see the full judgement click here.