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.
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.
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.
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.
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.
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.”