IR35 Goalposts Redfined

10 September 2008

Dragonfly Consultancy Ltd Loses Case in High Court

John Bessell, the owner of Dragonfly Consultancy Ltd, was left facing a bill of £99,000 for tax and NI when his appeal against a decision of the Special Commissioner under IR35 failed recently in the High Court.

The case, which was funded by the Professional Contractors Group, brought into close review the key aspects of many of the arguments hitherto used successfully to fend off suggestions by HMRC that a freelancer is self-employed rather than an employee of his/her client.

Key facts found by the Special Commissioner include:

• Mr Bessell’s pass to enter the AA building bore a “C” to differentiate between him, as a contractor, and employees.
• Mr Bessell was able to use the onsite canteen and was invited to attend staff social functions.
• Mr Bessell provided a special chair at his company’s expense for him to use on the AA’s premises, to assist him with a back problem.
• Owing to his back problem, Mr Bessell was unable to work for a time, and received no payment during this period.
• Mr Bessell had a designated office at home, with two laptops, a fax, a scanner and office furniture.
• During the contract, Dragonfly paid £400 for a training course for Mr Bessell, to benefit his work on the AA contracts; the AA did not reimburse him for this.
• Mr Bessell did not take holidays at times that were significantly inconvenient for the projects; but he never billed for time during which he was on holiday, nor did he receive any payment.
• Mr Bessell undertook a small item of IT work for one other client during the period of his contracts with the AA.
• As market rates for IT contractors fell, the AA reduced Mr Bessell’s day rate from £480 to £375.
• Witnesses gave a mixed view regarding substitution: other contractors had sent substitutes, but Mr Bessell never did, and there was ambiguity over whether one would be accepted without approval from the AA; the Commissioner found that one would not.
• Nobody told Mr Bessell how to do his work, but he was expected to complete tasks allocated to him by agreement with the team leader, and the standard of his work was informally monitored; he attended weekly team meetings and ad hoc discussions.
• The upper contract contained no right to send a substitute, and suggested that control rested with the AA; the contract between DPP and Dragonfly placed control with Dragonfly.

The High Court regarded these findings of fact as unassailable. The decision of the Special Commissioner was challenged under four main headings:

• Right of substitution on the part of the contractor
• Direction and control by the client
• Intention of the parties in setting up the contractual arrangements
• The meaning of ‘worker’ within employment tax law

Mr Justice Henderson’s judgment looks at each of these in turn, and whilst the arguments may not have gone in the tax payer’s favour, the clarification provided is helpful. In the process, the meaning of mutuality of obligation may also have been clarified.

A copy of the full judgment handed down on 3 September 2008 is available CLICK HERE.

There is clearly much to digest as a result of this case, and anyone concerned that their contractual arrangements may be on the borderline in relation to IR35 should take urgent professional advice. The goalposts have been redefined more favourably for HMRC, and it is to be expected that they will take full advantage of this.