Can an individual providing personal services to customers via their personal services company, be regarded as an employee of the customer?
The recent decision of the Upper Tribunal (UT) in the case of Mantides v HMRC suggests that, on the facts of that case, an individual providing personal services to customers via a personal services company - as a hospital locum - could be regarded as the customer’s employee under a hypothetical employment contract. The facts were complex and the case had been ongoing since 2019, during which Mr. Mantides had two separate hospital contracts challenged by HMRC. HMRC believed both contracts fell within the off-payroll IR35 rules, under which a contractor may be liable for broadly the same income tax and National Insurance contributions as an employee. For this article, it is sufficient to highlight the outcome of the UT's decision and outline the considerations for businesses below.
The conditions necessary for a contract of employment (also referred to as a contract of service) were outlined by MacKenna J in Ready Mixed Concrete v Minister of Pensions and National Insurance [1967] 2 QB 497 (“RMC”). While the assessment has evolved over time, the core factors for determining employment status remain largely consistent. These are:
(i) Mutuality of Obligation – There must be an obligation on the individual to provide their own work or skill, and a corresponding obligation on the organization to pay for it and to provide work during the contract period.
(ii) Control – The individual must agree, expressly or impliedly, to be subject to some degree of control by the organization over how and in what manner the work is to be performed.
(iii) Inconsistency Test – The terms of the contract must be consistent with those typically found in an employment contract. If the terms are inconsistent with employment, it is unlikely to be deemed a contract of service.
There are a number of authorities interpreting how this three-stage test is applied by tribunals and courts. Notably, in HMRC v Professional Game Match Officials Ltd ([2024] UKSC 29), the Supreme Court confirmed that mutuality of obligation and control are necessary - but not always sufficient - conditions for an employment contract. For example, a lack of obligation by the business to provide work does not automatically negate mutuality of obligation. Under the third limb of the test (the inconsistency test), all terms of the contract and the surrounding circumstances must be considered to determine the nature of the relationship.
Therefore, businesses seeking to engage contractors outside the scope of IR35 should ensure their legal contracts are well-drafted. Among other things, contracts should exclude any right of supervision, direction, or control by the organization over the manner in which the contractor performs their duties.
If you require further assistance, please do not hesitate to contact our HR/Legal advice line at 01455 852 028.
