IR35 Factors, IR35 Compliance, are you caught?

A freelance site has uploaded a podcast which discusses the landmark Dragonfly IR35 case and other points which contractors ought to be aware of in order to remain IR35 compliant.

In the 'Freelance Advisor' podcast, Steve Crouch of SRC Chartered Accountants discusses why the Dragonfly case is so important, and how contractors must ensure that their contracts reflect the reality of their working practices in order to keep outside the IR35 rules.

The Dragonfly Case

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

The judge presiding over the appeal hearing in late 2008, Mr Justice Henderson, agreed with this 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.

'Upper' and 'lower' contracts

In light of the Dragonfly case, Crouch points out in his podcast that freelancers should ensure that the contract between the contractor and the agency (the 'lower' contract) mirrors the contract between the client and the agency (the 'upper' contract).

HMRC had argued that although the agency - contractor contract allowed a substitution clause, the reality of the contract wouldn't allow this to happen as the client specifically wanted Mr. Bessell to work on project. Importantly, the agency - client contract did not contain a substitution clause at all.

Another important employment status factor - 'control' - was a large factor in the Dragonfly case. As part of a testing team, there were clearly managers involved which Mr Bessell reported to. The managers could move him onto different parts of the project. HMRC argued that a 'self employed' person would be able decide how the project was run.

Mr Bessell also worked a 40 hour week at the AA's premises using their equipment, and was found not to have taken any commercial risk - as he wouldn't suffer financially if the project went bad.

IR35 compliance in reality

Crouch says that as a result of the Dragonfly case, HMRC can use this ruling as a precedent in future IR35 status hearings. It is now more important than ever not only to ensure that your contracts are IR35 compliant, but that these contracts reflect reality.

You should also read our guide to the key IR35 compliance factors including the Right of Substitution, Control and Mutuality of Obligation.

IR35 Podcast

You can download the 19 minute podcast - "are your IR35 compliant?" - here