IR35: Slam dunk win for contractor

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An IT contractor who worked on the Universal Credit programme for the DWP has won his case against HMRC, which claimed his work fell within IR35. This ruling may have implications for other public sector contracts.

The taxpayer

Mr Wells has worked as a freelance IT contractor for around 25 years, serving approximately 20 different clients and performing around 60 different contracts in that time.

This is the second IR35 enquiry that Wells has been subject to, so he was determined to fight his case to the end. He was supported by Qdos Contractor Ltd and represented by Andy Vessey of Qdos at the first tier tribunal. The case was heard 4-6 October 2017 and the judgment was released this week, although it has not yet been published on the tribunal’s website.

The facts

In 2012/13 Wells performed a series of short contracts for the department of work and pensions (DWP), which each lasted around three months. The DWP contracted with Capita, which in turn advertised and found Wells to perform the work through his company Jensal Software Ltd (Jensal).

HMRC asserted that the DWP contracts fell within IR35, and raised assessments totalling £26,669 on Jensal for the tax and NIC due in respect of the deemed salary due to Wells under the IR35 rules.

MOO or not

HMRC argued that there was a mutuality of obligation (MOO) on DWP to provide work and Wells to accept it during the period of the contracts. However, the contract between Capita and Jensal specifically stated that no MOO was intended between the parties. 

It is interesting to note that the existence of MOO is not tested at all by the HMRC’s check employment status for tax tool (CEST), which public sector bodies are supposed to use to test whether a contract lies within IR35. HMRC states this is because MOO is assumed to always be present in public sector contracts, so there is no need to test for it.

The work Wells performed at the DWP was completed long before the rules for IR35 within the public sector came into effect on 6 April 2017, and before the CEST tool was available.

Substitution

Wells was not party to, and did not see, the contract between DWP and Capita, but that contract did include a substitution clause. However, HMRC argued that this clause was too widely drawn to be effective and that permission from the DWP would have been required to send a substitute. There was also a right of substitution in the contract between Capita and Jensal.

Control

HMRC said Wells was integrated into the DWP team and was subject to supervision by DWP managers. However, those managers gave evidence that Wells was left to carry out work as he saw fit, and was not obliged to attend DWP meetings. Wells could not be moved to different tasks by DWP alone, without agreement of both himself and Capita. 

In business on own account

As Jensal was paid a daily rate for Wells’ work, HMRC asserted that this amounted to a salary and that there was no opportunity for Wells to profit as he was not paid extra for overtime worked. However, Wells was not prevented from undertaking other work during the time he performed the DWP contracts.  

HMRC also asserted that Wells took no financial risk with the DWP contracts, but the court found that Wells would have been expected to correct faults in his own time. Wells provided some, but not all of the own equipment needed to perform the contract.

Tribunal decision

The tribunal judge had to consider the hypothetical contract between the DWP and Wells, which covered a chain of three actual contracts (DPW and Capita, Capital and Jensal, Jensal and Wells). She expressly excluded from this chain the HMRC questionnaire which was completed by the DWP managers in 2016, long after the contracts ceased.

The judge concluded that the hypothetical contract was not one of employment, and thus IR35 did not apply. She cited the following reasons:

  • There was no MOO beyond the irreducible minimum, as DWP was not obliged to offer further contracts and there was a period between the short contracts when DWP offered no work.
  • A right of substitution existed.
  • Wells was not subject to the degree of control and supervision which the DWP managers apply to an employee.
  • Wells was in business on his own account, he had an obligation to correct work and took out professional indemnity insurance cover. He had none of the benefits or training provided to DWP employees.

Commenting on the verdict Seb Maley, CEO of Qdos said: "In addition to showing that IR35 cases can actually be won in court, this case will likely lead contractors, agencies and engagers to rightly ask questions of HMRC's ability - particularly since public sector IR35 reform means the fee-payer holds IR35 liability and would be required to pay potentially colossal fines if they make a wrong decision."

Dave Chaplin CEO of ContractorCalculator agreed, saying “This judgement together with the chaotic implementation and ongoing troubles with the IR35 legislation in the public sector reinforce the view that HMRC cannot be trusted to accurately assess status themselves nor educate hiring firms how to do it properly either.” 

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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By Matrix
18th May 2018 10:48

While this is great news, it has not stopped the private sector consultation:

https://www.gov.uk/government/consultations/off-payroll-working-in-the-p...

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to Matrix
18th May 2018 12:01

Mildly good news, followed by horrible news.

Private sector wont roll over to have their tummy's tickled like the public sector has.

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By Matrix
to ireallyshouldknowthisbut
18th May 2018 13:59

Hopefully not but the government are not interested. I have already told my clients not to sign contracts going beyond April 2019 since they may need to put their rates up. If the private sector wants a flexible workforce then they can either assess each contractor separately or pay higher rates. So they should fight this since it will cost them either way.

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By raycad
to ireallyshouldknowthisbut
22nd May 2018 10:31

"Private sector wont roll over to have their tummy's tickled like the public sector has."

I really wish I could share your confidence in this but I very much fear that the private sector will turn out to be just as risk averse (and possibly even more so) than the public sector. Certainly for SMEs, where there would be a potentially serious impact on the bottom line if HMRC were to challenge a sub-contractor's employment status.

Hitherto, the cross to the Revenue's vampire has always been "make sure they work for you via a psc". If the private sector has to follow in the public sector footsteps this won't Count (sic!) for anything. One would also need to expose the said vampire to full sunshine!

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to Matrix
18th May 2018 17:28

I saw that. It is bad enough that local authorities whom I invoice once a year so they can be sent a journal send me form after form to complete to prove I am not their employee which clearly I am not on any basis, but that private sector clients will be going it too if this goes ahead without some kind of de minimis is even worse.

Perhaps the state will pay my hourly rate for each hour I spent completing all these forms.

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18th May 2018 17:26

He was clearly not an employee. I do not know why HMRC brought the case. They clearly had it in for him after an earlier 2003 investigation which also found him to be not an employee. He has been an IT contractor for 25 years and has lots of the hallmarks of not being an employee in my view.

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21st May 2018 11:16

I've always said that if you get the paperwork right i.e. contract for services, then HMRC haven't a leg to stand on.
Trouble is some people get too complacent, which spoils it for the others.

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By rkjh
21st May 2018 12:22

Does this mean that the Contractor could then have claimed holiday pay, and sickness pay (had he been off sick at all) and pension contributions from DWP had he been deemed to be an employee?

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to rkjh
21st May 2018 12:48

According to the EU it doesn't matter about employment status he still would be entitled to holiday pay as he is a "worker".

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26th May 2018 13:17

Rebecca, this is an excellently well put together article. We needed an updated position statement to help us determine the true position for our clients and the contracts they win as they develop their businesses.

Thank you for posting. I will circulate this article amongst our team by way of CPD / Guidance.

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