Contractor Mark Fitzpatrick has secured an important victory in a key IR35 case, in which a first tier tax tribunal in Bristol cited mutuality of obligation (MOO) as a significant factor in its decision to rule in his favour. He has been cleared of the charge of using his limited company, MBF Design Services, to avoid tax.
The ruling against HMRC marks the end of a seven-year legal battle by engineering contractor Fitzpatrick. He has had to prove that his contract with client Airbus was outside IR35. In doing so, with the support of PCG, he has effectively brought mutuality of obligation back into the frame as a crucial factor for determining a contractor’s IR35 status.
According to the tribunal, a key mutuality of obligation factor in Fitzpatrick’s favour was that Airbus could cancel the contract with MBF Design without notice. Another factor was that there had been occasions when, due to computer failure, contractors had been sent home without pay, whereas employees were required to remain on site.
Representing Fitzpatrick at the tribunal was Matt Boddington of Accountax Consulting, who said: “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.”
Fitzpatrick’s representation and seven year defence has been funded by the tax investigation insurance that came with his membership of PCG. That organisations’ Chairman, Chris Bryce, highlighted the renewed importance of MOO in IR35 cases: “This is a significant victory for the freelance community with particular emphasis on mutuality of obligation – a forgotten core principle of being in business.
“It shows yet again that IR35 is wasting taxpayer’s money in its application to freelancers,” continues Bryce. “[PCG] are working closely with the Office of Tax Simplification to try and bring clarity for the freelance community.”
This case highlights that HMRC is clearly still pursuing IR35 cases and that contractors should place renewed emphasis on establishing whether MOO is a factor in determining their IR35 status. ContractorCalculator’s free online IR35 test is a first step for contractors wishing to understand the IR35 status of their contracts.