IR35 is the elephant in the room in Plastic Omnium versus Horton

A program manager who started out on the front foot against his engager by claiming unlawful wage deductions might now find himself on the back foot -- should HMRC glance his case, writes Roger Sinclair, legal consultant at egos.

Indeed, I’d go so far as to say that IR35 is the elephant room in the case of the program manager, a Mr P Horton, versus the engager, Plastic Omnium Automotive Ltd, which began at the Employment Tribunal (ET) with his claim of unlawful deductions, but which has now been overturned by the Employment Appeals Tribunal (EAT).

Omnium v Horton, in a nutshell

Following the end of a contract, Mr Horton (the claimant) brought an employment tribunal claim against Plastic Omnium Automotive Ltd (‘Plastic Omnium’, the respondent), contending that he had been an employee, alternatively a worker, in relation to Plastic Omnium, and he claimed unlawful deductions from wages. 

Mr Horton had for some eight years, from 2011 to 2019, provided his services to Plastic Omnium as a program manager, via a series of two Personal Service Companies (PSCs). The first PSC was owned jointly by him and his then-partner; and the second was owned solely by him. 

Salary dividend-split, jointly owned PSC, and on an outside IR35 basis

Further familiar to limited company contractors, it emerged at the ET’s hearing that the companies had operated a salary-dividend split (in the case of the first company, to both him and his then-partner); and Horton “did not apply IR35 in relation to such income.”

After finding that (a) the original contract between the first PSC and Plastic Omnium in 2011 reflected the true agreement between the parties, and (b) the parties had then acted in accordance with that contract, the ET -- somewhat surprisingly -- decided that Mr Horton, while not having the status of an employee (as he argued), nevertheless had that of a ‘worker’ (as he also argued), in relation to Plastic Omnium. 

‘Fully integrated’

Significantly for ContractorUK readers keen to ensure their end-users don’t blur their IR35 status, the ET judgment records:

“On his first day of work, the claimant was introduced and treated in exactly the same way as another newly employed programme manager. In addition, he reported to the director in the same way as all other programme managers did. The judge found that the claimant was, "fully integrated into" the respondent's business for a period of time, in excess of eight years.’  

So it fell to the Employment Appeals Tribunal to get both back to the matter in hand, and to set matters straight, by reminding that worker status is a creature of statute. As a result, an individual will only have ‘worker’ status if (s)he:

 “has entered into or works under’ a ‘contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or service for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual’. 

The definition from the above comes from the Employment Rights Act 1996, section 230(3)(b) -- which is why an individual falling within this definition is often referred to as a ‘limb (b) worker’. 

Final thoughts (includes that elephant in the room)

Since the ET originally found that (a) the original contract between the first PSC and Plastic Omnium in 2011 reflected the true agreement between the parties, and (b) the parties had then acted in accordance with that contract, the only course open to the EAT was to overturn the EA’s original decision. And since the contracts had been between companies, and Mr Horton himself had not been a party to them, it followed that he could not be a ‘worker’ in relation to Plastic Omnium, since he did not have a contractual relationship with Plastic Omnium. 

And what I mentioned at the outset -- the elephant in the room? Well, the IR35 test requires an examination of whether or not a hypothetical contract between individual and client for the work that was done would have been categorised as ‘employment’. Given that the ET judge found that the claimant was “fully integrated” into the respondent’s business for “in excess of eight years”, one might be forgiven for wondering how HMRC might view that hypothetical contract.