Contractor beats HMRC in IR35 case – for the second time

A contractor won a key IR35 case against HMRC this week, which casts further doubt on the taxman’s ability to accurately recognise IR35 status.

On Tuesday, business analyst Ian Wells, the director of Jensal Software Limited won his First-Tier Tribunal Chamber IR35 case against HMRC.

Jensal Software Limited vs. HMRC – the basics

The case centred on the contractor’s working arrangements whilst working for the Department of Work and Pensions between May 2012 and April 2013.

Wells provided his services via a recruitment agency (Capita Resourcing Limited). At the hearing, which took place between October 2017 and this week, Judge Jennifer Dean ruled that Ian Wells’ contract was not caught by the Intermediaries Legislation, mainly because the client didn’t have a sufficient right of control over the contractor’s work:

“The level of control exercised did not go beyond that which was usual for an independent contractor. In balancing all of the factors I conclude that Mr Wells was not subject to the degree of control which would be necessary to constitute a contract of employment.”

In addition, the Judge also disagreed with HMRC’s interpretation of mutuality of obligation (MOO) and the right of substitution.

On MOO, the Judge stated that there wasn’t enough of an obligation to point towards employment:

“The essence of the relationship was that there was no continuing obligation on the part of the DWP to provide work; if it chose to abandon the project there was no contractual basis upon which Mr Wells could demand further work. I am satisfied that these factors point away from a contract of service.”

On substitution, she stated that oral and written evidence supplied showed that:

“…although the question of substitution did not arise, the hypothetical contract recognised the possibility of substitution which shifts the balance away from employment.”

You can read more about the key factors which are considered in determining IR35 status here.

Contractor investigated two times!

This ruling is one of several recent losses for HMRC. Another company, MDCM Ltd, successfully overturned a First-Tier Tax Tribunal result in March 2018.

Mr Wells clearly has a lot of stamina – as this was the second time he has been forced to defend his IR35 status – he won a previous case in 2004. This ruling raises serious questions about the taxman’s ability to intelligently target so-called ‘disguised employees’.

IR35 protection specialists, Qdos represented Mr Wells in both of his cases. Seb Maley, the company’s CEO commented:

“This is Mr Wells’ second IR35 case, which raises yet another question, this time over HMRC’s targeting of contractors. For a worker to be subject to an IR35 investigation is one thing, but twice is almost unheard of – I can’t recall another situation where a contractor has been investigated two times. You wonder whether HMRC is deliberately and wrongly targeting certain individuals.”

Why are HMRC chasing cases where the contractor is clearly outside IR35?

We asked Andy Vessey, who defended Mr Wells for his view on this: “In my opinion, the reason the department allowed this case to go all the way was that the end client was a public sector body, and they felt confident of winning and thus firing a warning shot across contractors’ bows. Thankfully, it blew up in their face.”

What does this judgement mean for private sector IR35 reforms?

Vessey said: “It certainly casts doubts over HMRC’s interpretation of IR35, and their perception of compliance in the public sector. Questions will certainly be asked about their rhetoric around non-compliance, with further scrutiny on the accuracy of their CEST tool.”

The importance of IR35 protection

The case also highlights the importance of considering taking out an IR35 insurance policy – which will cover the costs of professional representation in the event of an HMRC tax investigation. Ian Wells was covered by the simplest type of cover – tax enquiry insurance, which costs under £100 per year!

You can download a PDF copy of the ruling here.

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