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.

When IT contractors should quit

It’s not often in the last few years that IT contractors, the UK’s best-paid IT staff, have been forced to seriously consider whether to ditch their contracts for services.Even if contractors could bring themselves to ponder ‘resignation’ – a process more befitting permanent staff, the smell of other contracts over the hill would make it a quick decision.But these are changing times: still reeling this month from the credit crunch, six City banks told IT contractors to choose between pay cuts of up to 11% or immediate termination. In a separate but high-profile aside that followed, a bullish shadow home secretary, David Davis, demonstrated it was right to stand by your principles at work by taking the rare decision to quit as an MP. Despite one IT contractor sounding like the Tory MP by going on the offensive, saying the decision of his client, RBS, to cut his pay was “appalling,” he declined a speedy exit from the bank. “I disagree entirely with the contractor...who states that RBS’s approach is ‘truly appalling’,” blasted Steve Pragnell, a practicing IT consultant with 15 years' IT contracting under his belt.“The fact is RBS exists to make money, times are hard and the inevitable cost cutting is taking place. If such an attitude is detected on-site, it is entirely feasible that the contractor will not be offered back”.Rather than quitting when the IT jobs market is “truly awful,” he said contractors should use pay cuts as a chip to bargain for recompense for future cuts or better terms and work.“Contractors have to accept that rate is our primary weapon in the bad times,” said Mr Pragnell, who is the managing director of PM3, an IT project manager supplier.“Domain experience is extremely important, qualifications add a little weight but ultimately the first criterion clients are judging CVs by right now, is rate. “This is a simple case of supply and demand. The successful contractors that retain work throughout this downturn will be those that are flexible and willing to accept that even a 25% rate reduction is preferable to sitting at home waiting for the phone to ring.” But other areas of their work, other than the headline rate, which pre-credit crunch surveys have shown is a lesser priority, are causing contractors to consider their positions.“The most common reason for quitting a contract is probably late payment,” said John Kell, a policy officer at the Professional Contractors Group.“The key message is not to let a late payment slide - when that becomes a matter for walking out is, however, down to the individual contractor.”The problem of delayed payment is now so prolific that the PCG has issued fresh guidance on what to do if an agency or client is late paying or has become insolvent .Besides pay, concerns about unfair or restrictive clauses and worries about the MSC and IR35 tax laws are factors that typically motivate contractors to refuse a contract.“[But] I've never heard any great concern expressed by contractors about those [a client’s global development and corporate ethics],” Mr Kell added.“As for when contractors should consider quitting, that's a commercial consideration and really depends on personal circumstances.”Personal circumstances were the most important criterion for William Knight, a monthly columnist for CUK, who was forced to consider pulling out of his former job as a contract software developer.“In 18 years as an IT contractor I never had cause to quit a contract mid-term. That's not to say there weren't times when I considered it,” he said.“In one contract [I had] ‘a perfect storm’ of personal tragedy - my seven-year-old nephew died and then my father followed soon after- and stressful working conditions-… led me to consider leaving. Yet I still stuck it out, and eventually conditions improved.”If a situation is becoming too stressful, sooner rather than later the contractor needs to decide to quit or stay; though making the right choice is not easy, said Derrick Cameron, the managing director of IT-business consultancy Eximium Ltd .“When I worked as a freelance IT consultant, I was less inclined to walk away from a project just because I didn't like it.“I always felt that reputation was everything, and didn't want to burn any bridges, upset my customer or create the wrong impression amongst colleagues,” he said. “Of course, the crux of the matter is that if you don't truly believe in what you’re doing, you may actually be sacrificing quality of service and creating a poor impression.” For most IT contractors, Cameron said their quandary is whether to fulfil their contract and “go along with things as they are”, or listen to their instincts, speak out and potentially vote with their feet.“The act of resigning itself can be a positive move, acting as a proactive force and a catalyst for change,” he said. “It may even force a change of direction from management. On the other hand, are you simply taking the easy way out rather than making the effort to effect change from within?”Having weighed up the pros and cons of quitting, Cameron believes all IT contractors should pose themselves five key questions before deciding either way.
1. Does the situation compromise either your core values or your belief system?
2. How bad is it really going to be if you just put up with what's going on?
3. If you walk away, what are the implications for colleagues and the project itself?
4. Does being involved in the project cause you more grief than leaving it?
5. Is resigning defensible – and can you justify it to future customers or employers as doing the right thing?
But as Mr Davis is finding out, particularly from some of his critics, ‘doing the right thing’ isn’t always easy, not least because it normally involves personal and professional sacrifices.“However, the ability to feel pride and satisfaction in what you do is an important part of any job – whatever role you may have,” Mr Cameron countered.“For me, the message is clear: if you aim to stay true to your professional and personal principles, sometimes you have to take the more difficult path - and challenge the status quo.”But sometimes, like when the jobs market is not afloat with opportunities, it may be just as advisable to sit out the fight and see out the contract.“The joy of IT contracting is that bad contracts come to an end, usually after just three or six months, and you are free to leave without terminating the contract or soiling your reputation,” said Mr Knight.“I would recommend not signing up to more than three months at a time if the client is questionable, and your conduct as a professional should mean the trivial personal and political worries that plague ‘permie’ jobs do not unduly affect your mental health. Always remember your contract has an end date. You are not permanent!”

Article from Contractor UK.

Managed Service Companies (MSC) - New Regulations

From 6th April 2007 the Government introduced new tax rules relating to Managed Service Companies (MSC). Full guidance on the legislation is published by HMRC, details of which are given under Q13. This section of the REC Guide is a brief explanation for REC Members based on that guidance.
The justification for this legislation is the Government’s view that workers who work through MSC are invariably not in business on their own account, in other words they are not self employed for tax purposes. However, they are paid in a way which minimises the amount of PAYE tax and National Insurance Contributions (NIC) they are liable for. They do this by paying the workers a salary at the national minimum wage (NMW) and the balance by way of dividends.
IR35 legislation introduced in 1999 was supposed to ensure that those who worked through a limited company, of any description, and who were not genuinely self employed would be liable for paying PAYE and NIC on all income earned from providing their personal services. However the IR35 legislation has not been fully effective as a means of recovering tax shortfalls because it relies on an interpretation of the complex tests for self employment. Therefore, the Government enacted the MSC legislation in a bid to collect the £350 million of tax it believes is slipping through the net under the name of bogus “self employment”.
The new legislation requires a MSC to deduct PAYE tax and NIC on all earnings paid to workers and to apply the same rules for tax relief on travel expenses as apply to other employees. The new legislation goes further than IR35 in that it makes it compulsory to deduct PAYE tax and NIC if a company falls within the definition of a MSC. Further, if a MSC fails to deduct any or the full amount of PAYE tax and NIC, HMRC have powers to recover this shortfall from third parties, which can include employment businesses (from 6th January 2008). See Q4 & Q5 below. * Article from the REC website.

For the above reasons G & G Recruitment do not favour or recommend any MSC. Simply we can provide weblinks and contact details should contractors ask us for this information. If you have any more questions on this, please do contact us.