Tax & Accounting News

IT Contractor Loses in the High Court on IR35

01/10/2008

The High Court has found in favour of HM Revenue & Customs (HMRC) in the case of Dragonfly Consultancy Limited v The Commissioners for HMRC, on an IR35 issue relating to both income tax and national insurance contributions.

Also known as the Bessell case, this is one of a steady trickle of cases involving IR35 - the legislation that allows HMRC to tax some freelance contractors as though they are employees of their clients – reaching the courts. While HMRC may face administrative difficulties in challenging contractors, it is clearly intent on pursuing cases.

Structuring arrangements to be automatically outside IR35 is not a simple matter. Rather, it depends on the individual facts and what is actually happening in each case, with the nature of the notional contract between the individual and end-user remaining the key point.

In the Dragonfly case, the IT contractor, Jon Bessell, was seen as integrated into the client’s business and there was a “strong mutuality of employment”, both indicators of a contract of service, even though Mr Bessell had a home office, was only paid for work done and provided his own chair at the client’s premises.

Mr Bessell argued that the right of substitution (the right of a contractor to provide replace themselves with another individual with similar skills, which indicates that they are not providing the services themselves, as an employee would) supported his argument but this was found to be “very restricted” and therefore of little help.

HMRC appears to be ahead of the game and while it is still possible to win the IR35 argument, it is not a simple matter and will not be won by showing that a right of substitution exists.