IR35 Factors, IR35 Compliance, are you caught?

John Spencer, a retired IT specialist, experienced mixed emotions at a recent First Tier Tax Tribunal hearing.

Background to the case

Mr Spencer's company, JLJ Services Ltd, had appealed against tax and NIC assessments raised for the years 2000/01 - 2007/08, totalling nearly £153,000 plus interest of just over £48,000, for the period when Mr Spencer was contracting to Allianz, the German insurer.

The hearing recognized, that the contractor's net liabilities after tax paid was taken into account would have come to around £141,000.

During May 2000 - 31st December 2003, JLJ Services Ltd provided its services under a series of defined project related contracts, which the Tribunal ruled fell outside of IR35.

From 1st January 2004 onwards, however, the contracts changed to non-specific annual ones because Allianz wanted to retain Mr Spencer's services indefinitely.

This persuaded Judge Howard Nowlan at a Bristol Tax Tribunal that the contracts from that point on fell within the IR35 legislation.

As a result, Mr Spencer's tax liabilities under the IR35 rules will be significantly less than the sum originally demanded by HMRC, in what could be seen as a partial victory for JLJ Services Ltd.

Mr Spencer, a client of ClearSky Accounting, was represented by Neil Awbery at the hearing.

IR35 factors used in the hearing

Seb Maley, from Contractor Weekly, made some interesting observations on the Judge's findings in the case:

"Despite having a contractual right of substitution, the judge made some alarming suppositions in discounting the test.

(The Judge stated: "It seems to us that the substitution clause was one of the type always inserted in cases of this nature, having very little reality and that it should play virtually no part in influencing our decision.")

"He also dismissed the mutuality of obligations test as being virtually irrelevant.

(The Judge stated: "There is considerable case law in relation to this test, progressively indicating that the test is of diminished importance, or that it is indeed nearly meaningless. Some case law relates to the situation of 'umbrella contracts' between separate periods of admitted employment, and it is far from clear to us that the 'mutuality of undertaking' test is of much assistance to us in this case.")

"I think that the overall conclusion reached is probably correct; it is clear that Allianz wanted to keep Mr Spencer indefinitely and it is therefore likely that he would be subject to some sort of control.

"However, I strongly disagree with the judge's view on substitution and mutuality of obligation. Whilst MOO has become perhaps become less important over the years, recent cases had still given credence to it and it is still clearly a genuine test. To dismiss it completely is absurd."

You can read the full case judgement here.