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.

IT contractor liable for £99,000 tax after losing IR35 case

The High Court has ruled against an IT consultant who was fighting a £99,000 tax demand for work he completed on behalf of motoring organisation the AA.

The Professional Contractors Group (PCG), which represents UK IT freelancers, has expressed its shock at the judgement, which it said could have major implications for other consultants.
The "Dragonfly" IR35 case involved PCG member Jon Bessell, the owner of Dragonfly Consultancy. He is now liable for £99,000 in tax. Speaking after the judgment was delivered, he said, "I am devastated by today's news. Not only does it affect my family and me, but all the other freelance professional consultants who are trying to earn an honest living. "I was never an employee of the AA and I simply cannot understand how the High Court has reached its decision. It is a travesty of justice."

The judgement found that Bessell was technically an employee of the AA when completing IT projects for the organisation, and that he was therefore liable for the £99,000 tax demand.
The Professional Contractors Group supported Bessell in bringing his appeal because of the potential wider implications of the case.

PCG managing director John Brazier said, "This is a potentially massive blow to freelancers throughout the country. This case threatens the long-established defences against IR35.
"We will be looking at the judgment in very close detail to work out its full implications."
The Professional Contractors Group will be publishing further guidance on the consequences of the judgment shortly, he said.

* - Article from Computer Weekly.

It is worrying that despite the Government always saying that they support small businesses and the freelancer market they permanently seem to be trying to clamp down on this section of our workforce. Back in 2002 one in ten of the working population was self-employed. I would imagine that this number has only increased in the last few years. Surely this number of people should be supported more. Yes everyone should pay tax (it's not like in the UK we aren't taxed enough) but what is the point of trying to better yourself, earn more, improve your and your family's living standards, add to the economy if all your hard earned money is going to be whittled away. The whole process should be simplified. It is all the Government rules and regulations that mean thousands are spent on Accountancy fees which still don't guarantee you safety from the long arm of the HMRC. Simplify it, make it easier to understand, promote entrepreneurial and innovative thinking, promote small businesses, promote freelancers, because without them this economy would struggle and companies will find skills that they want are now based abroad. It isn't really surprising that many people are looking abroad to try and find that better standard of living!!! I mean, this Government will take 40% of your hard earned money which you have paid tax on all your life and which you want to leave to your loved ones after you have died. Fair - I think not.