An engineer working on a contract basis for Airbus UK won his appeal against HMRC's determination that he should be taxed as an employee under IR35 rules rather than as self-employed.

Following a hearing in Bristol in November, the First Tier Tribunal found in favour of MBF Design Services, the trading company operated by Mark Fitzpatrick. In February 2009, he appealed against HMRC's decision that his employment status for the years 2001-07 fell within the terms of the Social Security Contributions (Intermediaries) Regulations 2000 and Income Tax (Pay As You Earn) Regulations 2003.

In April 2003 Airbus took on Fitzpatrick and his company MBF under a contract via intermediaries GED-Sitec and Morson Human Resources at an hourly rate that increased if he worked more than 35 hours in a week. The tribunal noted that the “request for services” to which the contract related included a seven-day notice period and a stipulation that substandard service or attendance would give Airbus a legitimate claim to withhold payment.

The tribunal notes that the contract agreed between Morson and Airbus named 53 individuals and appeared to be based on one normally used for the purchase of goods, with Fitzpatrick's “quanity” indicated as 42,500 hours at his usual hourly rate.

The third contract between Morson and Airbus also included a clause setting out the client's right to immediate cancellation of the contract, which was crucial to the tribunal's decision that the terms were inconsistent with the mutuality of obligation that exists between employee and employer.

During the course of the hearing, one of HMRC's witnesses, an Airbus design manager, admitted that his statement had been prepared by HMRC. While not doubting his honesty, the tribunal judges were not impressed with his evidence.

Noting that in the theoretical circumstances of a contract existing between MBF and Airbus, the judges ruled that the arrangements were typical of a contract for services. On site working was not a conclusive indicator of employment, the judges ruled. The nature of Fitzpatrick's design work meant it had to be done computers at Airbus's premises computers, in a similar way that electricians or plumbers frequently work on client sites.

Airbus's right to cancel the contract without notice indicated a lack of mutuality of obligations, as did a series of occasions during computer failures where contractors were sent home without pay and employees had to remain on-site. Rather than seeking promotions, the contractor had to renegotiate with Airbus if he wanted better terms.

According to Matt Boddington from Accountax, who was MBF's lead representative at the hearing, the tribunal concluded there was insufficient control to demonstrate a contract of service. Any checking and approval of design work was an inevitable necessity of the project work MBF had undertaken.

“This is a significant bloody nose for HMRC and highlights that if parties arrange their affairs correctly and if these arrangements are an accurate reflection of reality then the IR35 legislation simply will not bite,” said Boddington.

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