Massive IR35 victory for HMRC over IT Contractors in Dragonfly Consulting appeal

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Dragonfly Downed

The High Court has dismissed the appeal by Dragonfly Consulting against the IR35 verdict by the Special Commissioner.

This means that IT Contractor Jon Bessell now has to pay a bill of £99,000 to HMRC .

According to the PCG this has undermined much of the good work it has done in case after case where it has fought the good fight for IT Contractors against IR35.

Whilst the PCG suffered initial major losses at High Court level it has gradually picked away at IR35 with a myriad of victories at lower levels and has helped many contractors when they have been targeted for IR35 tax losing very few cases.

It has taken a long time and a lot of effort to put together all those victories but now much of this great work has been undone and IT Contractors may all suffer for it.

Four Pillars

Both the PCG and IT Contractors have based much of their resistance on the four pillars of Substitution, Control, Intention of the Parties and Workers Rights.

However, the High Court has taken each of those and torn them down.

They concluded that the Special Commissioner was right when he ruled that Jon Bessell was a de facto employee of the AA, despite his contract and his limited company – and that he was caught by IR35.

If he is caught by it then a lot of contractors will be caught by it.

No Substitutes Wanted

There was a right of substitution in his contract but the AA said that they would not have been happy if one had just turned up without them vetting the substitute whether they had been sent by Dragonfly or by DPP his agency, through whom he had been working at the AA for 3 years.

The legal team for Dragonfly said that the Special Commissioner wrongly ruled that the right of substitution in the contract was not inconsistent with an employment status, that the intentions of the parties were irrelevant as regards employment status, that there were gaps in the contract as regards control, that he wrongly saw only two statuses, i.e. in business on your own account and employment and that he should have seen another status of self employment.

The judge considered and ruled on each point:-

Substitution

He ruled that each of the contracts between the AA and Jon Bessell were for the services of Mr. Bessell only. He said that the Special Commissioner was right in assuming that the AA would not have accepted an unqualified right of substitution.

So, it looks as if the Rights of Substitution can only be claimed in the future by contractors if it is unqualified, i.e. the contractor can replace himself or herself, for a time, at a company without having the company vet the substitute.

Control

The judge concluded that Job Bessell was under the control of the AA to a level beyond just directing him where and when he should work. He said that the Special Commissioner was quite right to view that control as pointing to employment under IR35.

Intention of the Parties

In the circumstances of the present case, the Special Commissioner was right to say the the intention of the two parties were less important than the actual practice in terms of whether the contract was caught by IR35. Even if they didn’t intend to create a relationship of employment it was up to the Special Commissioner to decide if one had been created, whether they intended to create one or not.

Worker Status

The judge disagreed that there was an intermediate category between being on business in your own account and being employed. He said that the Special Commissioner was justified in making a straight choice between whether a contract was a contract of service or it wasn’t.

The Special Commissioner felt that this contract fell on the side of the line of employment and that he considered this unassailable.

Big Bill

Now, Jon Bessell has a huge tax bill for £99,000 and other contractors will be wondering what this means to them and whether they are now going to get huge bills from HMRC too.

There is no doubt that this is a huge victory for HMRC and seems to fly in the face of other judgments that have come down on the side of contractors.

The Professional Contractors Group will be desperately disappointed as they were set up for the purpose of fighting IR35.

Further Analysis

There will be further considerations and analysis over the coming days as to what effect this is likely to have on contractors as a whole and what, if anything, can be done about it.

There’s no doubt no, though, that many contractors who considered themselves and their contracts to be outside of IR35 will now find that HMRC consider them to be caught by it.

That is a chilling thought – especially as no one knows who will be targeted next.

All those contracts with substitution clauses in them may now turn out to be useless in protecting contractors from IR35.

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