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IT contractor defeats HMRC in decisive fashion in latest IR35 case

Another contractor has defeated HMRC in the latest in a flurry of IR35 rulings to emerge in 2018. In the IR35 case of Jensal Software Ltd v Revenue & Customs, IT contractor, Ian Wells, successfully appealed a total tax bill exceeding £26,000.

Key points to emerge are:

  • All elements of the contract pointed towards the individual being an independent contractor.
  • Mutuality of Obligation (MOO) not enough to point to a contract of service (inside IR35) – further weakening HMRC’s stance on MOO and decision to omit it from its CEST tool.
  • Level of control fell far below the sufficient degree required to demonstrate a contract of service.
  • The right to substitution pointed away from an employment contract.
  • Why didn't HMRC recognise before the appeal that Mr Wells’ contract clearly belonged outside IR35?
  • HMRC does not understand IR35, and is wasting taxpayer’s money by pursuing hopeless cases.

Wells provided services through his limited company, Jensal Software Ltd, to the Department of Work and Pensions (DWP) between May 2012 and April 2013. HMRC argued that had there been a direct contract between Wells and the DWP, it would have constituted a contract of service, i.e. inside IR35.

However, in a conclusive ruling (download here), Judge Jennifer Dean stated: “Although there is mutuality of obligation it does not extend beyond the irreducible minimum, nor does it demonstrate that the relationship was one of a contract of employment. Moreover, the level of control falls far below the sufficient degree required to demonstrate a contract of service.”

“This was a slam dunk win for the contractor, where all elements of the contract, examined clearly, pointed towards the individual being an independent contractor,” notes ContractorCalculator CEO Dave Chaplin.

Seb Maley, CEO of Qdos Contractor, which represented the appellant comments: "This is another example of HMRC slipping up again, and it was surprising - and worrying – that it didn’t recognise before the appeal that Mr Wells’ contract clearly belonged outside IR35.”

Jensal Software Ltd v HMRC: the key IR35 factors

HMRC once more relied on its narrow interpretation of mutuality of obligation (MOO) when composing its arguments, which again backfired. Judge Dean concluded that, although Wells provided his services for payment – the irreducible minimum upon which HMRC argued that MOO was present – it wasn’t enough to demonstrate a contract of services.

Considering personal service, Judge Dean noted that, although Wells’ right to substitution was fettered, it still pointed away from an employment contract. This was decided on the basis that there were no restrictions imposed on the clause, which Wells had the right to enact in any circumstance.

Wells completed a hat-trick over HMRC, with Judge Dean concluding that the amount of control present did not suggest a contract of employment. Though Wells had met with DWP staff to deliver progress reports, Dean determined that the level of control exercised did not go beyond that which is usual for an independent contractor.

Will MOO decision be the final nail in the coffin for CEST?

Central to the decision on MOO was Judge Dean’s distinction that there was no continuing obligation on the DWP to provide work, suggesting a contract for services and therefore outside IR35.

The decision further weakens HMRC’s stance on MOO, and particularly its decision to omit MOO from its Check Employment Status for Tax (CEST) tool on the basis that it inherently exists in all contractor engagements.

“The further clarification provided by this judgment once again demonstrates that HMRC’s assumption about MOO is plainly wrong, and therefore that CEST is fundamentally flawed,” comments Chaplin. “A ruling such as this really should be the final nail in the coffin for CEST.”

HMRC pours taxpayer money into a losing battle

Unlike the MDCM Ltd v Revenue & Customs case, which surfaced two months ago, where HMRC relied on its own officers to appear in its defence, this time the taxman called on costly legal counsel to fight its corner.

The outcome of this case will raise many question marks over HMRC’s decision making, especially given the conclusiveness of the ruling, as Chaplin highlights:

“First, you have to question why this case went to tribunal at all, as the odds were stacked so heavily in the contractor’s favour. HMRC wouldn’t usually go to tribunal if it wasn’t sure that it would win, yet its arguments were lacklustre.

“Second, why waste the taxpayers’ money on hiring a leading Barrister for a tribunal case which any IR35 expert would tell you is a foregone conclusion? This case clearly demonstrates that HMRC does not understand IR35 or employment case law, and is not capable of effectively enforcing the legislation.”

Maley adds: "HMRC hopes to recoup hundreds of millions of pounds by tackling what it believe is wide-scale non-compliance. However, a verdict such as todays suggests it is actually wasting the taxpayer’s money by pursuing hopeless cases."

Join our IR35 campaign

ContractorCalculator is actively campaigning to put a stop to Governments plans to expand the public sector IR35 reforms to the private sector.

To support the campaign against IR35, please subscribe to our mailing list, and help raise awareness by following the instructions set out on our IR35 campaign page. Please follow or connect with our CEO Dave Chaplin on LinkedIn. Dave regularly posts about the IR35 reforms and is an essential contact to have for keeping abreast of the latest news surrounding the legislation.

Published: 17 May 2018

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