IR35 Case Laws

 

There are two main pieces of case law that are very relevant to IR35 regulations. The first is known as the Dragonfly IR35 case, which was eventually resolved at the High Court in September 2008.

The case raised a number of issues which contractors wishing to avoid being caught by IR35 regulations should be aware of:

  • Although some of the contracts between John Bessell, the director and owner of half of Dragonfly Consultancy Limited, and the agency through which he was employed at the client organisation (the AA) contained a clause retaining Dragonfly‟s right of substitution, the contracts between the agency and the AA made no reference to such a right. The lack of any right of substitution in these contracts was considered a strong indication that Mr Bessell was an employee of the AA. This is why it is essential that the contracts drawn up between you and your agency and between your agency and your client are in line with one another and insist on your right of substitution.
  • Some of the contracts involved in the case were begun prior to the introduction of the IR35 regulations. Although clauses which appeared designed to demonstrate that Mr Bessell was working outside the scope of the IR35 regulations had later been inserted, these were insufficient and in fact were seen to give the impression that they had only been introduced in order to avoid IR35.
  • Mr Bessell changed the content of his later contracts with AA to remove references to working under the client‟s direction and supervision. Again this was seen as an attempt to avoid IR35 rather than a genuine reflection of the way in which the work was undertaken, because Mr Bessell‟s earlier contracts had been quite clear that he would work under direction.

 

As a result of these issues, the Judge at the High Court considered that Mr Bessell was directly employed by AA, and he was ordered to pay unpaid taxes of £99,000. A key lesson for contractors is the need to ensure that the contracts of employment reflect the precise working arrangements adopted in the course of the work.

 

Usetech Limited

 

The second case of relevance to contractors is the Inland Revenue‟s case against William Hood, of Usetech Limited. Although Usetech was employed through an intermediary agency, NES, at the client company ABB, the Inland Revenue considered that Mr Hood was in fact directly employed by ABB and that the payments made to Usetech should therefore be subject to personal Income Tax and National Insurance contributions.

Mr Hood argued that Usetech had retained a right of substitution, allowing the company to provide someone else to carry out the work if Mr Hood was unavailable, and that because ABB was not obliged to provide work and Usetech was not obliged to provide the services, there was a „want of mutuality‟. However, the Judge considered that these points were not valid.

Regarding substitution, the Judge pointed to the fact that there was no substitution clause in the contract between NES and ABB (although there was one in the contract between Usenet and NES). He also noted that Tax and Employment legislation created a hypothetical employment contract between Mr Hood and ABB, which did not contain a substitution clause.

Regarding Mr Hood‟s argument that there was a „want of mutuality‟ in the relationship, the Judge observed that the contract between NES and ABB required ABB to find work for Mr Hood. Factors in support of this observation included the fact that the work had lasted 17 months, at around 58 hours a week; the fact that Mr Hood was never – to his recollection – sent home without pay; that the contract contained a minimum-hours clause; and that Mr Hood did not know the details of the contract between ABB and NES.

The Judge concluded in light of these observations that there should have been a hypothetical contract of employment between Mr Hood and ABB and that this contract would have obliged ABB to provide Mr Hood with work.

 

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