In May we reported the difficulties experienced by HMRC in successfully finding individuals who provide their services through personal service companies in breach of the IR35 rules. Much of their difficulty lies not just in their interpretation of the rules but in the opacity of the rules themselves. A recent case before the First Tier Tribunal involving a locum doctor has simply underlined these difficulties and emphasised the finely balanced interpretation required to assess whether or not someone can be considered employed, or self-employed under the rules. 

Employed or self-employed?

George Mantides, a locum urologist who provided his services to various NHS Trusts via a Personal Service Company (PSC), George Mantides Limited (GML), was defending a challenge by HMRC that two of his engagements to two separate hospitals, provided through GML, were subject to IR35 and thus GML was liable to pay income tax and NI. The ruling was interesting: the presiding judge found that the nature of one of his engagements (to the Royal Berkshire Hospital (RBH)) pointed to employment (caught by IR35) and the other (to Medway Maritime Hospital (MMH)) pointed to self-employment (outside IR35).

On the face of it, George Mantides’ arrangements with both hospitals looked broadly similar. Both hospitals engaged the services of locums through agencies who were responsible for carrying the necessary checks into suitability to practice, and for paying the locums for their time. However there was a crucial difference between the terms of engagement with the agency that provided locum services to RBH, and the one that performed the same service for MMH. GML had a formal written contract with MMH whereas the arrangement with RBH appeared to be limited to two agency Locum Booking Confirmations.

Substitution, obligation, and termination

During the case, both arrangements were unpicked line by line. In the end, the decision rested on the difference between three key factors within the respective terms of engagement: the right to substitute, mutuality of obligation, and termination. The judge found, in the case of MMH that George Mantides had specifically included in his contract with the hospital, the right to substitute an equally well-qualified doctor in his place should he be unable to perform the contract himself. Indeed, Mr Mantides attested to the fact that he held a list of several urologists whom he could recommend to the agency as suitable substitutes. Second, there was no mutuality of obligation between MMH and Mr Mantides. Although Mr Mantides undertook to make himself available for 37.5 hours a week, the hospital was not obliged to provide him with a minimum number of hours. Lastly, the contract with MMH could be terminated at any point with only one day’s notice of termination required on either side.

By contrast, the looser arrangement with RBH, compared to the more precisely-worded contract with MHH, exposed Mr Mantides to HMRC’s charge that IR35 applied. The judge ruled that there was no explicit agreement that RBH would accept a suitably qualified substitute in any circumstance other than illness; there was a mutual understanding that Mr Mantides would have between 30 and 40 hours work a week, and that RBH undertook to provide that number of hours; finally, RBH did not provide for the contract to be terminated at any point over the agreed term.

Both sides of the argument can take some comfort

This case demonstrates, once again, the nuance inherent in many contracts whereby the courts have to look beyond the individual clauses and consider the intentions of both parties as a whole. The MMH contract was certainly clearer in its intent as it specifically stated, for instance, that Mr Mantides could substitute another professional to cover his work, whereas the RBH arrangement was unclear, leading the court to infer that substitution was only possible if Mr Mantides was unable to attend due to illness.

It is also is particularly key for the many locum medical staff employed either directly by NHS Trusts, or through agencies. Given there are a number of determining factors indicating self-employment (or not) that many locums would struggle to meet, such as providing one’s own equipment, the MMH ruling gives a crumb of comfort. What it does emphasise is the need to draft terms of engagement very carefully to ensure that there is a right to substitute, that there is no guarantee of minimum hours to be worked, and that there is no termination provision other than a day’s notice on either side.

HMRC will also no doubt take some comfort from the RBH ruling. However, every time a court takes a magnifying glass to terms of engagement, it will reveal any cracks that might subject them to an HMRC challenge, enabling those who draft such terms to seal them against future investigations. Ultimately, the problem may be solved by a comprehensive review and amendment of the rules - but to date there has been no suggestion that might happen. In the meantime, anyone currently providing their services via a PSC should review the terms of their engagement thoroughly.

What can you do?

If you think that you might be caught by the rules, it is important to address your concerns sooner rather than later. We represent a number of clients who have been affected by this legislation and have helped clients to negotiate a settlement with HMRC following enquiries. In addition to helping clients with HMRC determinations and enquiries, we have also been successful in obtaining compensation from parties’ professional advisers.  Typically clients have conducted their tax affairs in this way following advice from their accountant, financial adviser, tax adviser or even their solicitor.  These professional advisers owed a duty of care to provide honest and appropriate advice on the risks associated with tax avoidance.  In such circumstances you may have a claim for professional negligence.

About the author

Israr Manawer Tax Consultant

Israr is a Tax Consultant within the commercial litigation team, he previously worked for HMRC. Israr is experienced in dealing with disputes related to tax avoidance schemes, pensions, HMRC enquiries and negotiations.