IR35

IR 35- Contracting issues

A recent tax case (Dragonfly Consulting Ltd V HMRC) has shown that HMRC is still pursuing IR35 through the courts. The determination in favour of HMRC was for PAYE and NIC totalling £99,000!

The company’s sole director (Mr Bessell) was an IT system tester. Dragonfly Consulting, via an agency (DPP), provided services to the AA. HMRC took the view that if the services had been provided under a contract directly between Mr Bessell and the AA, Mr Bessell would have been regarded for income tax purposes as an employee of the AA.

There was no perceived financial risk to Dragonfly Consulting because the basis of payment was for time worked and there were no essential expenses incurred by Mr Bessell. The AA provided equipment enabling him to undertake the work and use of his own laptop was not fundamental to the work he was required to do

Although substitution of an alternative was mentioned in the Dragonfly/DPP contract the DPP/AA contract was silent on the point and the manager for AA said it would not happen in practice. This shows that the outcome of an investigation may depend on what the end-client says and not what it says in the lower contract. Where substitution is key to supporting your status you must request sight of the upper contract.

In addition the court looked at control and determined that the AA had sufficient control in terms of “what” was done but also that they could also control “how” he worked as well as “where” and “when”. The degree of control was that which would be expected from a skilled professional employee. If your contracts have been in place for some years, maybe it is time for a health check!

May 2009