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Contracting business Marlen Ltd. wins IR35 case against HMRC

Contractor Gary Hughes has won his case against HMRC after a Birmingham tax tribunal ruled that “there is no mutuality of obligation and the degree of control which would have been needed to establish a contract of employment just did not exist.”

Nicola Smith of Accountax Consulting who represented Hughes said to ContractorCalculator: “It was always our opinion that IR35 did not apply from the outset. The tribunal found that the irreducible minimum [required to demonstrate a contract of employment] was not present and it only takes one factor to be missing for the relationship not to be one of employment.”

HMRC had argued that a mutuality of obligation existed between engineering contractor Hughes and his client JCB within each of a series of contracts between JCB and Hughes’ contractor limited company Marlen Ltd., and that the provisions of IR35 applied.

However, several factors suggested otherwise as Smith explains: “There were early terminations by both parties and, as in the case of MBF Design Services Ltd., the contractor was sent home without pay alongside other contractors when the client’s IT systems were not working.”

Smith’s arguments were so compelling that the Judge Lady Mitting called a halt part-way through the Judgement to say: “We have considered two factors – mutuality of obligation and control. These are the two factors which make up the irreducible minimum required to demonstrate a contract of employment.

“Whilst we found some evidence of control, that which does exists falls short of that which is required in the terms of the test propounded by MacKenna J. The picture in relation to mutuality is even clearer.”

Although the full facts of the case will not be revealed until the ruling is published, the Marlen decision already bears the hallmarks of yet another IR35 case that should never have been brought before a tribunal.

“There are different interpretations of the law,” Smith told ContractorCalculator when asked on what basis HMRC might have brought the case, “and [HMRC’s interpretation] does not always follow with case law.”

Published: 01 July 2011

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