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Dragonfly decision could threaten IR35 defences for thousands of contractors

Jon Bessell, sole director and 50% shareholder of Dragonfly Consulting Limited, was found by the Special Commissioners to be inside of IR35 in January this year. Bessell, supported by the Professional Contractors Group, went to the High Court in June in an attempt to overturn the ruling.

If the ruling by the Special Commissioners is upheld by the High Court, Bessell faces a bill of £99,000 in tax, National Insurance Contributions and penalties.

Whilst devastating personally for Bessell, if the ruling is upheld, tens of thousands of contractors could find themselves at risk of being found by HMRC inside of IR35.

‘Part and parcel’

A key finding of the Special Commissioners was that Bessell was ‘part and parcel’ of the client’s business, the Basingstoke based Automobile Association Limited.

Despite a range of factors demonstrating that Bessell was not an employee and running a legitimate business the Commissioner stated: “Overall I find nothing which points strongly to a conclusion that Mr Bessell would have been in business on his own account.”

This alarming conclusion was reached even though Bessell satisfied prior IR35 case law supporting his status as outside IR35, including:

  • Maintaining a designated home office, with computers and office furniture
  • Not billing for time he spend away from the client on holiday and when off sick
  • Paying for training out of Dragonfly company funds and not charging these costs back to the client
  • Supplying a special chair at the client’s premises to help with a back problem paid for by Dragonfly
  • Taking a day rate reduction when contractors’ market rates fell.

Each of these tests normally contribute to placing a contractor outside of IR35.

For the Commissioner to disregard so many factors pointing towards Bessell being outside of IR35 could potentially threaten the defence offered by tens of thousands of contracts who might come under investigation.

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Substitution and control

There was a mixed response from the end-user client when asked about substitution. The contract between Dragonfly and the agency DPP suggested control and the right of substitution rested with Dragonfly.

However, the contract between DPP and the AA suggested control rested with the client, and the Commissioner concluded that there was limited scope for substitution without permission from the AA.

Bessell was not told by the client how to do his work, but he was informally monitored for performance and he was present at team meetings and ad hoc discussions.

Intentions of the parties ‘irrelevant’

What is highly concerning about the Commissioners findings was that the intentions of the client and contractor were considered to be irrelevant. This means that even if a contractor and client are satisfied the work is being completed on a contract for services by a contractor’s limited company, the Commissioners can disregard their wishes.

As a result of this ruling, the precedent is that HMRC are in effect dictating to contractors and clients the exact nature of the working relationship, regardless of the contractor’s and client’s wishes.

For the Commissioner to disregard so many factors pointing towards Bessell being outside of IR35 could potentially threaten the defence offered by tens of thousands of contracts who might come under investigation.

The ruling by the High Court is expected very soon and ContractorCalculator will report on the appeal and its implications as soon as the decision is announced.

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Published: 19 August 2008

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