Contractors IR35 Verdict Victory
An IT Contractors IR35 Verdict Victory will benefit many contractors. It has ramifications for the whole profession.
The judge gave a fairly liberal view, and beneficial to freelancers, of the three main IR35 Factors. They are:-
- The Right of Substitution
- Mutuality of Obligation
- Supervision, Direction and Control.
She also ruled in the contractor’s favour on some of the other 9 more minor IR35 Factors.
Right of Substitution
HMRC must be frothing at the mouth at this one.
Many contractors have a right of substitution clause in their contracts.
HMRC believe this to be a sham and in contracts just to take freelancers outside IR35.
They believe that there would never be any substitution made if ever the contractor couldn’t make it in to do his or her work.
The contract always has the clause that the substitution would have to have the agreement with the client.
HMRC believe that the client and contractor would never trigger this right of substitution.
However, they can’t prove it.
Right of Substitution to Apply Automatically
And a previous court decision by a previous judge ruled that the right of substitution would have to be assumed to apply unless it could be proved that it was a sham, i.e. that an opportunity to substitute came up and it wasn’t triggered.
Oh, how HMRC must feel frustrated over this.
The good news from this case is that this judge has reinforced this.
There was a Right of Substitution Clause in both the contract between Capita, the agency, and DWP, the client and between Capita and Jensal, the contractor’s limited company.
HMRC argued that it wasn’t effective as it was too widely drawn and WP would have to give their permission.
However, the judge gave as one of the reasons for ruling that the contractor was outside IR35 that there was a right of substitution.
Just because it wasn’t triggered didn’t mean it was a sham. The onus would be on HMRC to prove that it was a sham.
Mutuality of Obligation
HMRC argued that there was a Mutuality of Obligation. They said that DWP had to provide work for him and he had to do it. This is despite the contract between the two parties saying that there was no Mutuality of Obligation.
However, the judge ruled against HMRC in this area.
She said that Mutuality of Obligation was minimal. There was a period between contracts when DWP offered no work. DWP had also no obligation to offer future contracts.
This is great news for all contractors. This is a much more lax interpretation of Mutuality of Obligation than previously.
Usually they look at the contract itself to see if the company is obligated to pay the contractor and the contractor obligated to do work for the client.
No Obligation to Provide Future Contracts
This judge said that the fact that DWP had no obligation to provide future contracts to the contractor means that there was no Mutuality of Obligation.
That is huge for fixed term freelancers all over the UK.
Companies have to provide long term work for employees and must pay them long term. They have no obligation to do this for contractors.
So, that differentiates them from permanent employees according to this judge.
Virtually every contractor throughout the lands works on the basis of a fixed term contract. Companies can renew this or not renew this contract at regular intervals.
Just as an side, it might be an idea for contractors to take a week or two off between contracts with the same company to do a few other things just to double prove that there is no Mutuality of Obligation between themselves and the client.
Supervision, Direction and Control as an IR35 Factor
As regards, Supervision, Direction and Control, HMRC claimed that DWP had control over his work and that they integrated him into the project team.
The judge ruled that, although here was a measure of control and supervision, it was a lot less than that which they exercise on permanent employees.
For instance, Mr Wells didn’t go to staff meetings, he was more able to get on with his work than permanent staff, and the company couldn’t move him to another project or give him different work without Mr Wells and his agency Capita agreeing to that.
They can do this with permanent employees.
Judgment Highlights Differences between Contractors and Employees
Whereas previous court verdicts have looked at the similarity of work done, and the way of operating, by an IT Contractor and a permanent member of staff on a project, this verdict highlights the differences.
It basically said that, although, in some ways, Mr Wells operates in a similar manner to permanent employees, as regards the company giving him work and the contractor doing it, there were also dissimilarities too.
And this judge saw those as reasons to say that there was less supervision, direction and control on him than on a permanent employee.
So, the judge saw this as differentiating the contractor from a permanent employee. She saw this as taking him outside the IR35 test of Supervision, Direction and Control.
Fantastic News for All Project Based Contractors
This is fantastic news for all contractors.
Most contractors, especially IT contractors, are project based. They work on a project team.
Previous judges’ verdicts saw that as meaning that they failed the Supervision, Direction and Control test.
However, this judge saw enough differences in the way this contractor operated, compared to the permanent employees, to make him outside IR35 on this measure.
Whereas previously most fixed term project contractors could be deemed to be caught by IR35, now this judge’s verdict would take them outside IR35.
This is huge for contractors.
Best Ever IR35 Verdict for Freelancers
This Contractors IR35 Verdict Victory is massive for the whole profession.
It may even be the best verdict that contractors have ever had since the beginning of IR35 in 1999.
This contractor, who was very much a typical project based contractor, was judged to be outside IR35 on all three major IR35 factors.
What could be better for all freelancers.
In Business on His Own Account
To make it even better, the judge ruled that he was in business on his own account.
HMRC said that he wasn’t as he was on a daily rate which they said was a salary.
They also said that he wasn’t able to profit from it as he wasn’t able to do any overtime.
These are two of the nine more minor IR35 factors.
However, the judge ruled against HMRC even here.
Work for Other Clients – Contractors IR35 Verdict Victory
There was nothing in his contract to stop him doing work for other clients at the same time. Permanent employees are expressly forbidden to do that by their contracts with the company.
The court rejected HMRC’s plea that there was no financial risk with the DWP contract. The court said that he would have had to fix problems in his own time.
He also had to take out indemnity insurance, which permanent employees don’t, which showed that there was financial risk to him.
He also didn’t get any of the benefits and training that a permanent employee gets.
Massive Contractors IR35 Verdict Victory
This Contractors IR35 Verdict Victory is a massive one for what is a fairly typical IT Contractor over HMRC.
It blows IR35 wide open.
This Contractors IR35 Verdict Victory also calls into question the competency of HMRC to create a definitive IR35 test when they have got it so decisively wrong in this case.
The IR35 test they created has been used by public sector departments as the Oracle when determining the IR35 status of contractors.
More than half a million freelancers have now sat the test to determine their IR35 status.
Almost all of those contractor previously operated via limited companies outside IR35.
HMRC’s IR35 Test
However, only 54% of them passed HMRC’s IR35 test with 31% failing and 15% not able to be determined sufficiently.
By the way, you can be sure that the heads of departments in the public sector would not now allow the undetermined contractors to operate via a limited company – just in case.
So, you could say that as far as this IR35 test is concerned, it is almost a toss up.
Government Bringing IR35 Changes to Private Sector
And the Government is now in consultations prior to their intentions of bringing the public sector IR35 changes, along with the IR35 test, into the private sector too.
This likely to happen in either April 2019 or April 2020.
However, this judge has blown a huge hole in both this plan and the HMRC IR35 test.
This test is almost certainly currently concluding that contractors are inside IR35 who this judge would consider to be outside it.
Contractor Took Out IR35 Insurance
Luckily this contractor took out IR35 insurance so he was able to fight the case without great cost to himself.
As I said above, you couldn’t get a much more typical IT Contractor than this one.
So, that’s why it is great news for all contractors everywhere.
The ramifications of this verdict will be immense.
What’s different about this judge’s verdict is that instead of looking for any similarities between the way freelancers and permanent staff operate, she looked at the differences in the way they operate.
Any when she saw differences she said that this proved that the contractor was not a disguised employee and was outside IR35.
This Contractors IR35 Verdict Victory can be shared by all freelancers.
There will be dancing and carousing in the streets of Freelancerland tonight, you can be sure.
Are you now outside IR35? Try the new contractor IR35 Test based on this judge’s verdict.
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