Why Dragonfly got caught by IR35

A combination of factors brought this case down. The simple fact that it concerned a succession of contracts and extensions, commencing before the introduction of IR35, all for the same client, the terms of which contracts changed in details from contract to contract, left a fair degree of uncertainty as to what the terms actually were. Plus, the succession of changes, intended to create a more IR35-friendly background, probably lead to the conclusion that they were solely there for that purpose, and thus undermined their own credibility – the damage had already been done.

The succession of extensions compounded the risks – just as there are ways in which a later and better worded extension can potentially improve the position for earlier periods, provided it accords with reality, the converse can potentially apply – i.e. earlier less favourable terms can drag down later and more favourable terms. It’s a question of whether or not one can show that the later term in fact more accurately represents the reality.

It has long been recognised that overstaying one’s welcome with a particular client can compound IR35 risks, particularly where (as here) an appearance is created of the individual gradually becoming integrated into a team.

The fact that the agency-client contract had been entered before IR35 was even a twinkle in the eye of Gordon Brown that clearly did not help!

On Control, the case makes clear that where

• an engagement is to do work allocated as the contract progresses (as opposed to agreed at the outset), that may be capable of amounting to a sufficient degree of ‘control-what’

• there is a submission to guidance, or monitoring, or appraisal, that may be capable of amounting to a sufficient degree of ‘control-how’ to put the hypothetical relationship between individual and client at risk of being considered to be one of ‘employment’, for IR35 purposes.

Clearly, contractual provisions in early contracts which expressly provided that the contractor company was engaged to provide the individual to perform services under the client’s

• ‘direct supervision and control’ (first contract)

• ‘direction’ (second contract)

and requiring the individual to comply with ‘customary rules and regulations for the conduct of the client’s own staff and the client’s customary working procedures and security measures’ were unhelpful, even as background and not specifically relied on in the conclusions. It’s hard to interpret them in any other way than that the individual was expected to ‘fit in’ and become part and parcel of the client’s organisation as if he were an employee.

The true meaning of Mutuality of Obligation – ‘MOO’ – may be taken to have been further clarified; whilst it remains a negative from an IR35 viewpoint to be entitled to payment other than for services actually provided, to avoid that is not a complete get-out; at its barest essential, an obligation to provide services personally (i.e. without a genuine and unfettered right to substitute), in return for payment, will generally be regarded as sufficient MOO to constitute the basis for an employment-type relationship, if other factors too support that conclusion. So it must now be accepted that MOO can exist, without any obligation on the part of the engager to either provide work, or to pay in lieu; though of course if there were such obligations, they would clearly be additional negative factors.

On Substitution: the contractor was a 'one-man' company, and it was said that its sole raison d’être was to supply the individual’s services; the suggestion was made that the fact that such a company entered a contract which did not mention the individual by name might not of itself be sufficient to undermine the implication of an obligation to provide services personally. Admittedly here it was in the context of a sequence of contracts, of which some earlier and some later did name the individual. Nevertheless, this gives some cause for concern.

Two or more contractors might consider using a ‘partnership company’, to help avoid the suggestion that the sole raison d’etre is to supply the services of but one individual. They would need to manage this themselves, of course, to steer clear of the MSC legislation. But for such a company to contract for specified services, without any individual being named, would clearly help avoid the suggestions here that the only implication was that the one person behind the company would be doing all the work.

Overall

Whichever way one views it, this is a case which sets out the detailed interpretation of IR35, in a way which is clear and logical, and will provide a valuable first point of reference for the future. You may not like it, but at least this spells out what you have to do to work around it!

Analysis written and provided by Roger Sinclair, a legal consultant at Egos, a legal advisory for IT contractors.

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Employers 'cut back recruitment'

Demand for permanent staff in the UK fell last month for the first time in five years, a survey suggests.
The survey by the Recruitment and Employment Confederation and KPMG said the UK job market continued to weaken as employers cut back on recruitment.
Demand for temporary workers also eased to the weakest pace since May 2003, the survey based on data from recruitment agencies and employers found.
But wage inflation accelerated despite the overall fall in job vacancies.
The survey said shrinking job opportunities meant there was a bigger pool of candidates chasing permanent and temporary work.
Alan Nolan, a director at KPMG, said the report proved the credit crunch had taken its toll and had weakened the UK jobs market.
"Many employers now seem to be accepting the inevitable - they will have to cut costs by laying off people because their businesses won't be growing as much as they could have expected a couple of months ago," he said.
KPMG said financial firms in the City and housebuilders had already shed jobs, but there was more bad news to come.
"Even the usually robust temporary jobs market is coming under pressure, adding to the likelihood of a stagnant jobs market and rising unemployment for the foreseeable future," Mr Nolan added.

* - Article from www.bbc.co.uk

G & G Recruitment have not noticed any change in demand for staff within the Public and Not-For-Profit sector. We believe that the problems within the Financial services could well mean increased applications and competition for jobs within the Public and Not-For-Profit sector.