The confusion over HMRC’s application of the IR35 legislation continues after an IT contractor successfully appealed to the First Tier Tribunal (FTT) against a tax charge of some £26,000 in connection with a project he was working on with the Department for Work and Pensions (DWP).

In Jensal Software Ltd v HMRC Commrs [2017] TC 00667, the IT contractor, Ian Wells, successfully appealed a tax bill relating to a succession of contracts during the 2012/13 tax year. Wells provided his services through his limited company, Jensal Software Ltd, to the Department of Work and Pensions (DWP), via recruitment agency Capita.

Wells worked on a project which formed part of the DWP’s universal credit rollout, which involved attending a DWP office and travelling to different sites. He had the use of a secure DWP laptop and the tribunal heard evidence of meetings between Wells and DWP managers on the project.

HMRC contended that there was a direct contract between Wells and the DWP during the period of engagement, and that this represented a contract of services (as opposed to a contract for services).

HMRC relied heavily upon evidence provided by DWP officials, who noted that Wells was required to give feedback on the progress being made throughout the project. They also argued that Wells was expected to come to work each day.

However, Wells’ submissions demonstrated that he had full autonomy over the work completed while noting that he would regularly work off-site under his own volition. This was confirmed by a project colleague, who noted that Wells managed his own time and location around the demands of the role.

Three conditions determining employment status were examined in depth by the Tribunal. The first is commonly known as ‘mutuality of obligation’, the second relates to the degree of control and the third is a negative condition, i.e. where it is shown that there is: ‘requisite mutuality of work-placed obligation and the requisite degree of control, then it will prima facie be a contract of employment unless, viewed as a whole, there is something about its terms that places it in a different category.’

Mutuality of obligation

Judge Jennifer Dean stated: ‘The essence of the relationship was that there was no continuing obligation on the part of the DWP to provide work; if it chose to abandon the project there was no contractual basis upon which Mr Wells could demand further work.

‘though there is mutuality of obligation it does not, in my view, extend beyond the irreducible minimum nor does it demonstrate that the relationship was one of a contract of employment. Moreover, the level of control falls far below the sufficient degree required to demonstrate a contract of service.’

The judge also pointed out that each contract lasted a short duration. The break between the penultimate and final contracts of approximately two weeks indicates that there was no contractual obligation for the DWP to provide continuous work.

The judge said: ‘It was also clear from the evidence of all of the witnesses that Mr Well’s engagement did not extend beyond the specific project in respect of which his skills were required.

‘The position as borne out by the facts is that there was a period during which one contract ended and the DWP was under no obligation to continue to offer a further contract. No further work was offered for a short period. Moreover, Mr Wells was under no obligation to perform the work and in relation to the final contract Mr Wells terminated the final contract when a better offer presented itself.’

Control

On this subject, the judge commented: ‘The level of control exercised did not go beyond that which was usual for an independent contractor. In balancing all of the factors I conclude that Mr Wells was not subject to the degree of control which would be necessary to constitute a contract of employment.’

Conclusion

The judge concluded that the appellant’s circumstances were such that they were not caught by the IR35 legislation, and in turn, this outcome now throws further uncertainty into the IR35 framework. On 18 May 2018, the government launched a consultation on proposals to extend the IR35 rules to the private sector (see Off-payroll working in the private sector). This consultation will run until 10 August 2018. It now seems very likely that changes to the regime will be announcement in due course.