IR35 Factors, IR35 Compliance, are you caught?

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An IT contractor faces a huge tax bill after losing his landmark IR35 appeal. More worryingly, however, is that the loss may have undermined long-established defences against IR35 for the contracting world in general.

Dragonfly Consultancy Limited faces a huge £99,000 bill after its director was found to have been 'within IR35' during an IT contract with the AA.

In January 2008, the Special Commissioners agreed with HMRC that Dragonfly's director, John Bessell - a systems tester, should be treated as being 'employed' for IR35 purposes by the AA.

At the hearing, it was acknowledged that the contractor had a limited right of substitution, but overall he was effectively 'part and parcel' of the organisation - a strong pointer towards being caught by IR35.

The judge presiding over the appeal hearing, Mr Justice Henderson, agreed with the original Special Commissioner's opinion that Mr Bessell's IR35 defence was weak.

Although Mr. Bessell had paid for his own training and equipment, the overall pointers towards 'self employment' were not strong enough for his contract be be outside IR35.

You can read full analysis in our Guide to the Dragonfly case.

Mr Justice Henderson said that it was 'unassailable' that Mr Bessell had a relationship of employment with his client:

"Overall I find nothing which points strongly to the conclusion that Mr Bessell would have been in business on his own account; by contrast when I stand back and look at the overall picture I see someone who worked fairly regular hours during each engagement, who worked on parts of a project which were allocated to him as part of the AA's teams, who was integrated into the AA's business, and who had a role similar to that of a professional employee. Mr Bessell did not get paid for, or go to work to provide, a specific product; instead he provided his services to the AA to be used by them in testing the parts of a project which from time to time were allocated to him. He was engaged in relation to the work to be done on a specific project but not to deliver anything other than his services in providing testing in relation to that project. In my opinion he would have been an employee had he been directly engaged by the AA."

Mr Bessell, 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's a travesty of justice."

The PCG, who supported Mr Bessell in the appeal process, also expressed its shock at the decision. John Brazier, PCG's MD, 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."

IR35 Dragonfly case resources

Read our essential guide to the Dragonfly IR35 case.

You can read the full Dragonfly Judgement here.

In light of the Dragonfly IR35 appeal verdict, a leading IR35 status expert says that IT contractors should review their IR35 status and mitigate their risk.

You can access Roger Sinclair's expert view of the case on the Profesional Contractors Group site here.

Also, read our article on the importance of the Dragonfly IR35 case.