The Cost of IR35

The long-awaited appeal in the landmark IR35 case, Dragonfly Vs HMR&C, is over and Jon Bessell is left with a tax bill of almost £100,000.

Despite the fact that equipment and training were paid for by Mr Bessell’s business, Dragonfly Consulting, and despite a contract which had a right of substitution Mr Justice Henderson decided that Bessell’s IR35 defense was weak. He commented "Overall I find nothing which points strongly to the conclusion that Mr Bessell would have been in business on his own account..”

What is IR35?

IR35 allows HM Revenue and Customs to determine whether contractors are working in business in their own right or whether they are ‘disguised employees’. If you are deemed to be inside IR35 you will be taxed via PAYE. If you are unsure of your IR35 status, please contact one of our advisors on 01206 713 680 or on info@contractorumbrella.com.

Background to the Dragonfly Case:
Jon Bessell was the director of Dragonfly Consulting Ltd and was working, through an employment agency, for the AA. He lost his appeal because Special Commissioner Charles Hellier ruled that he was ‘subject to the guidance of his team and team manager’ which was considered to be ‘a sufficient right of control. He had become ‘part and parcel’ of the organisation.

“[The SC] is therefore of the opinion that Mr Bessell was a ‘professional employee’.”

John Bessell appealed his defeat in June 2008 in the High Court, where the RoS (Right of Substitution) was called into question. A right of substitution allows the contractor to send someone to work on their behalf if they are unable to attend the client site for any given reason.

Although the employment agency had included a RoS clause in the contract, HMRC claimed that the AA would be able to approve or reject a replacement for Mr Bessell and therefore there were not enough grounds for appeal. Mr Justice Henderson, presiding over the hearing, questioned whether the RoS was simply ‘window dressing’ and if it was in-fact possible for a one-man band operation to exercise a RoS?

This is what’s called a fettered right of substitution. The term ‘fettered’ means a restrictive substitution clause, used purely to force an extra pointer towards falling outside of IR35. When, in reality, the possibility of being able to provide a substitute is almost non-existent.

A final point
If you feel concerned about your IR35 status, please do not turn a blind eye and hope for the best. Have your contract reviewed to ensure that you are operating legally and avoid devastating, life changing consequences like Mr Bessel has experienced.

It is worrying the number of calls that our new client services team receives, stating that the contractor has received a contract that has been written to fall outside of IR35. A contract can be written to fall outside IR35, but if it doesn’t accurately reflect your working practices, it really isn’t worth the paper it’s written on.

Many contractors are raising concerns about this judgment and the effect it will have on future IR35 cases; many have assumed in the past that there are ‘ways round’ IR35, Mr Bessell has found, to his cost, that there are not!

If you would like to discuss any issues surrounding IR35 or would just like to make a general enquiry, please do not hesitate to contact a member of our team on 01206 713 680 or email us at info@contractorumbrella.com

Our free IR35 guide gives more in-depth information on the legislation and can be downloaded, along with 2 other guides, from our download section.