A word of caution

Having considered this micro site specially focussed on IR35 you may be feeling confident about making your status decision.  Before you take the final plunge take a few moments to consider the Dragonfly Case (2008).

Despite the fact that  equipment and training were paid for by Dragonfly Consulting, and despite a contract which had a  right of substitution, the judge decided that the appellant’s IR35 defence was weak.  He commented “Overall I find nothing which points strongly to the conclusion that Mr Bessell would have been in business on his own account.”

It is worth noting that the defence relied heavily on the  substitution clause which was ‘fettered’ – meaning the Hirer had the right to reject the substitute.

It is evident from this case that HMRC will challenge cases where there is an over-reliance on one status test, particularly when the overall circumstances do not demonstrate a business relationship.

Additionally, you need to ensure that arrangements with your Hirers do not change from IR35 Pass to IR35 Fail during your engagement.

In the case of JLJ Services Ltd v HMRC, Judge Nowlan ruled that the last 4 years of a 7 year engagement were inside IR35. The Tribunal found that John Spencer, an IT Contractor operating through JLJ Services, moved from being on a series of specific contracts to having an annual contract that was repeatedly extended, eventually to 4 years, and that during this time Mr Spencer took on any tasks asked of him rather than specific contracts – the characteristics of being an employee.

The Judge also dismissed a substitution clause in the contract, said that in the circumstances mutuality of obligation was of “diminished importance”, and said that the intentions of the parties were of “very minor significance”.

Additionally, whereas control was limited for the first 3 years, for the final 4 years after Mr Spencer had ceased to be engaged on specific projects, he became subjected to greater control by his client.

It is evident from this case that HMRC and the Courts will look at the status of a contract over an extended period and, where the relationship changes, they will apply penalties. This is a particular risk for ‘revolving’ contracts which automatically renew unless cancelled, and 1st Option recommends that Freelance Professionals are more cautious with these types of assignments.

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