This case is significant because it concerns an IT contractor working on a project for the Department of Work and Pensions (DWP), – a public sector contract. Although the work was performed in 2012/13, before the IR35 rules were amended for all public sector contracts, the analysis of the employment status tests is still relevant.
Mr Wells worked through his own company: Jensal Ltd, on four contracts for the DWP over a course of a year. Crucially these short contracts did not all follow on immediately one to another, there was a break of two weeks between the third and fourth contract, and that last contract was terminated early by Wells so he could start work elsewhere. The judge accepted that this was good evidence of the lack of mutuality of obligation (MOO) for both sides to provide and perform work over the whole year, which points towards self employment.
The online tool (CEST) which public sector bodies are supposed to use to check whether a contract is within IR35, does not test for the existence of MOO. This is apparently deliberate as HMRC assumes that MOO will always be present with public sector contracts. This is clearly not the case.
The judge also found that Wells was in business on his own account (through Jensal Ltd), as he took financial risk; he had an obligation to correct work in his own time. He also took out professional indemnity insurance cover. He had none of the benefits or training provided to DWP employees. Although the work Wells did was directed by the DWP managers, he was not subject to the degree of control and supervision which the DWP managers applied to the DWP employees. All of these factors contributed to the judge’s decision that IR35 did not apply in this case.
We don’t normally bother you with consultation papers, but you should be aware that HMRC is consulting on changing the IR35 rules for private sector contracts. It isn’t clear whether the current rules for the public sector – where the engager makes the decision about IR35 – will be completely imposed on private sector businesses, but some changes will be made, probably with effect from 6 April 2019.
If you are potentially subject to IR35, we advise you not to commit to contracts which run beyond 5 April 2019. At the very least you may have to increase your prices from April 2019 to cover the higher tax deductions.
Written by the Tax Advice Network