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New IR35 ruling: Partial victory for JLJ Services v HMRC

IT contractor John Spencer’s company JLJ Services has won a partial IR35 victory in its four-year battle against HMRC. It is likely to significantly reduce the contractor’s original £140,000 tax bill, as Tribunal Judge Howard Nowlan ruled that only the last four of the seven-year contract with client Allianz were inside IR35.

Key facts of the case:

  • IT contractor John Spencer, contracting via his own company JLJ Services, worked on contracts for client Allianz from 2000 to 2007
  • HMRC claimed he was inside IR35 for all seven years of the contract and insisted on a settlement of unpaid income tax and National Insurance Contributions (NICs), interest and penalties of £141,000
  • Judge Howard Nolan ruled in a Bristol Tax Tribunal heard on 24 and 25 October 2011 that IR35 did not apply for the first three years of the contract, but after that Spencer had then taken on all of the characteristics of an employee
  • Spencer moved from being on a series of contracts for specific projects to having a one-year contract that was extended repeatedly over four years; and during this time his client could ask him to work on any tasks, not specific projects. In other words, he had become a ‘tail-end charlie’
  • The contract had a mirrored substitution clause, which the Judge said stopped short of being ‘a complete sham’; indeed, the client claimed any substitute would have to be interviewed and hired independently
  • Control was limited up until the and of 2003, when Spencer “ceased to be engaged for identified projects” and was in reality more controlled by the client
  • Spencer failed the ‘in-business’ tests as there was, in the Judge’s view, no opportunity to profit and Spencer was “simply paid for hours worked”
  • Mutuality of obligation (MOO) was dismissed by the Judge as irrelevant: “...the [MOO] test is of diminished importance,” he said
  • The parties’ intentions were also dismissed by the Judge as having “very little or no importance”. He said: “Their [Spencer and his client] opinion on what is a matter of realistic construction of the overall facts is of very minor significance.”

The client said that using contractors was a convenient ruse to circumvent the German parent company’s rules on headcounts, when in fact the affected people should have been employees.

A further analysis of the case will follow.

Published: 09 December 2011

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