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HMRC Defeated in Recent IR35 Case

Spring Budget U-Turn

In a time of apparent reform for the IR35 legislation, Her Majesty’s Revenue & Customs’ charge against non-compliance is stopped in its tracks as they lose First Tier Tax Tribunal against Ltd company contractor.

IR35 cases have never been black and white, but despite their complexities, since HMRC launched dedicated teams tasked solely with enforcing the legislation, the number of investigations in the working status’ of Ltd company contractors has been on the rise. With an aim to recover an estimated £700 million from Ltd companies via IR35, and the Government looking to roll out a full reform of the legislation, HMRC was in dire need of an IR35 success story.

Qdos win IR35 case against HMRC

Qdos has been working alongside Ltd company contractors for over two decades, and since the IR35 legislation was introduced, have successfully defended over 1500 contractors, saving clients over £35million in tax.

In their most recent outing, HMRC took on a Ltd company contractor, claiming that they hadn’t been paying sufficient tax via their PSC, deeming the contractor inside IR35 with liabilities of over £25,000.

Ian Wells provided services as a business analyst via Personal Service Company Jensal Software Ltd and was put under the microscope by HMRC for the period May 12 – April 13. The company provided services via recruitment agency Capita Resourcing to the Government ran Department of Works and Pensions. Jensal Software Ltd engaged in multiple contracts with Capita, and HMRC launched an enquiry focussing on the working arrangements between the contractor and the end client.

The case looked into the working practices of the contract, focussing on the degree of control that the end client had over the contractor, as well as the mutuality of obligation and the strength of the contractor’s right of substitution. You can read more information about the case here.

With Qdos at the defence, HMRC were ultimately defeated in their case, and after a three day hearing in 2017, the Judge ruling the tribunal delivered the decision that the contract in question was deemed outside IR35, thus the payment of £26,669 in tax and national insurance contributions that HMRC claimed the contractor owed was not required.

Judge Jennifer Dean commented saying: “the level of control falls far below the sufficient degree required to demonstrate a contract of service. Looking at the overall picture and making a qualitative assessment I am satisfied that the relationship is consistent with a contract for services, not a contract of service.”

Despite tough talks of IR35 enforcement against contractors, HMRC failing to understand and determine a contractor’s IR35 status fuels fire to the rumours that HMRC have an apparent lack of understanding of the legislation they are striving to impose. Qdos Contractor CEO Seb Maley commented on HMRC’s knowledge of the legislation saying: “Despite HMRC implementing and enforcing the rules, this verdict shows they can’t accurately assess a contractor’s IR35 status.” Moreover, on talks of the potential private sector reform, he further added: “This case is further proof that IR35 needs simplifying, and HMRC must rethink its IR35 strategy completely. Clearly, this is no time to extend public sector changes to the private sector.”

This recent defeat will have been a significant blow to HMRC, and no doubt sets any plans of IR35 reform back somewhat. The case in question reinforces the importance of contractors seeking information and understanding the IR35 legislation. As a leading accountancy company, Qdos Accounting supports many contractors and provides ongoing guidance and advice when it comes to compliance and working status. The future of IR35 remains unknown, but understanding the legislation has never been more critical.

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