An individual has won a pay-out of roughly £15,000 in an employment tribunal (ET) case, which could spell trouble for firms who fail to comply with the Off-Payroll rules, should they arrive in the private sector.
In the case of Mr A Reilly v AJS Interiors Ltd, site manager Mr Reilly was awarded the sum, which comprised compensation for unfair dismissal, net notice pay and accrued holiday pay. This was after it was found that he had been engaged in an employment relationship with AJS Interiors Ltd, despite providing his services via a limited company.
The tribunal heard how Reilly, previously an employee of AJS Ltd, set up a limited company in 2013 on his employer’s insistence, and continued to work in this way until AJS Ltd terminated the engagement in January 2018.
With Off-Payroll in the private sector seemingly on the horizon, the outcome serves a timely reminder to hirers that non-compliant efforts to minimise their tax liability will yield significant consequences, as well as further clarification of the current legal position, as Senior Manager at Ernst & Young (EY), Justin Roberts, highlights:
“Parties in an employment engagement agreement will need to make sure that both substance and form are aligned and that, if changes are made, any contractual amendments are accompanied by corresponding change to the relationship in practice. We emphasise that any potential employment tribunal claim should be considered in light of individual circumstances that may impact on both employment and tax criteria.”
Mr A Reilly v AJS Interiors Ltd: the facts
Having worked as an employee for seven years, Reilly was approached by AJS Ltd director, Dalziel Geary, in April 2017, who proposed that he provide his services via a limited company.
Following Geary’s instructions, Reilly incorporated ACJJ Building Services Ltd and began invoicing for work carried out. Crucially, aside from this, Reilly continued to work under the same conditions that had underpinned his employment contract.
Following the termination of the engagement, Mr Reilly brought his claim for unfair dismissal, and failure to pay notice and holiday pay against AJS Ltd, having consulted the Citizens Advice Bureau to ascertain his employment status.
Though the respondent argued that there was an agreement between the two parties for Reilly to provide services as a subcontractor, almost all factors pointed toward a continued employment engagement, including:
- Exclusive provision of personal service to AJS Ltd
- No control on behalf of the claimant regarding how work is completed
- Requirement to work 45 hours per week between the hours of 8:00am and 5:30pm
- Provision of paid holiday leave
- Continued use of a company car.
The above factors led employment Judge Brown to conclude: “It is clear on the facts that I have found that the respondent required the claimant to work personally for the respondent pursuant to the contract of employment that they entered into in 2006.”
Will ruling deter would-be non-compliant hirers?
Hirers are advised to heed the warning issued by the outcome. Following widespread non-compliance with the Off-Payroll rules in the public sector, there are concerns that issuing private sector hirers with the responsibility for assessing employment status will result in further contrived arrangements.
This case demonstrates one potential avenue that contractors might explore if deemed ‘employed for tax purposes’ under IR35 in claiming employment rights, although Roberts encourages all interested parties to judge each engagement on its own merits:
“This ruling does not necessarily mean that any contractor currently working inside IR35 would have a valid ET claim if their hiring firm were to suddenly end their engagement. Where the facts and circumstances are similar to those in Reilly, such a claim may indeed be brought, but any potential claim must be considered on its own facts.
“In Reilly, it was clear that nothing had changed in practice during the time that the claimant moved from employment to ‘contractor’ status, beyond the reclassification in contract. A hiring firm will still be able to end a contractor’s engagement provided that it is terminated in accordance with the contract and that there is no indication that the contractor either formerly, or perhaps always, should have been considered an employee.”
EY Associate Partner, John Chaplin adds that the hiring firm’s decision to alter the engagement structure while maintaining the same working conditions should serve as a reminder to HMRC that it is not only contractors who are responsible for non-compliance:
“In Reilly, the fact that the director told the claimant to change the engagement structure – as well as the supporting reasons provided – were key in exposing respondent company’s intentions. From the firm’s perspective, if there is likely to be a discussion at the point of engagement about why it will be managed in a particular way, it needs to ensure that it realistically and accurately fits with the firm’s intentions.”
Could Reilly judgment trigger further ET claims?
The ruling demonstrates that artificial self-employment can be contested effectively, while the recent Elbourn judgment shows the ET can also be used to challenge an incorrect ‘employed’ status assessment. While these outcomes may not necessarily trigger an influx of ET claims, Chaplin notes that how contractors, hirers and HMRC respond will be of interest:
“It may be the case that, as a result of recent hearings, HMRC begins to monitor this area more closely. Contractors may also be more likely to claim employment or worker rights as a result of the growing debate in this area, particularly if they are deemed ‘employed for tax purposes’ under the Off-Payroll rules and feel that this is the wrong answer for them.
“As individuals seek to work in increasingly varied and flexible ways, it will be crucial for firms to ensure that they are aware of the true tax and employment status of their workforce.
“The implementation of Off-Payroll in the private sector may lead to some difficult conversations with contractors. Those who are unhappy will, of course, be able to consider their options in light of claims brought by fellow contractors, whether those contractors were found to be employees or not.”
Contractor ET claims unlikely to attract tax risk
Notably, although the ET confirmed Mr Reilly’s status as an employee, he will not automatically incur any tax liability for the period for which he was remunerated through his limited company, due to the fact that he entered into the arrangement in good faith. As Chaplin explains, this serves a valuable lesson to contractors that querying employment status at ET won’t necessarily attract a tax problem:
“We emphasise that in Reilly there was no discussion of the tax liability, as it was noted in the judgment that there was no malice. It’s also important to note that this was an ET claim focusing on unfair dismissal and related employment rights. HMRC would, therefore, have to take its own compliance actions if it wished to enforce tax liability.”
Chaplin adds: “Where a ‘contractor’ has paid the ‘correct’ amount in good faith, it is unlikely that enforcement action will be pursued against the contractor. HMRC is unlikely to target contractors for arrangements made in good faith just on the basis of a successful employment rights claim, but clearly could pursue the employer if the facts supported such a claim.”
Roberts also believes contractors who successfully challenge their status during a previous engagement have little to worry about with regard to historical tax risk, but reiterates that contractors should consider substance over form:
“HMRC has said that it will not automatically pursue contractors for historical IR35 taxes where the engager decides that IR35 applies from April 2020. However, only time will tell how much reliance can be placed on this statement, and so contractors are advised to continue carrying out their due diligence in the meantime.”