IR35 Tribunal Win for Qdos Contractor

Qdos Successfully Defends Second IR35 Enquiry for Jensal Software Ltd

Late last week we received confirmation that the IR35 tribunal case Qdos Contractor defended last October had at last concluded with a successful outcome for the contractor.

This was not the first time that Jensal Software Ltd (JSL) had been subject to an IR35 enquiry - Qdos had already been called upon to defend an IR35 enquiry for JSL in 2003. Having successfully defended the earlier enquiry, it was rather surprising that the company became subject to yet another one.

The company’s Director, Ian Wells, was rightfully confused at having been picked on a second time, having already successfully been deemed to fall outside of IR35. Although his company has taken on different contracts since the earlier enquiry, Wells claimed that the working practices had not changed.

Wider implications

After initially considering two contracts, eventually and rather predictably, HMRC focused all its attention on the public sector contract JSL held with the Department for Work and Pensions (DWP) from May 2012 to April 2013.

It appeared that HMRC in taking this case to Tribunal were looking to make an example in view of the fact that it was a public sector contract, but it appeared as though they had either not fully appreciated the strengths of the case, or had ignored them.

Andy Vessey, Qdos’ Head of Tax who attended the Tribunal and represented JSL, had voiced his dissatisfaction in dealing with the HMRC Status Inspector who was reluctant to accept the evidence provided and was seemingly looking to find evidence to persuade HMRC that JSL were caught by IR35 rather than considering the evidence laid in front of them.

HMRC have been criticised for such behaviour previously, specifically by the Special Commissioner in the 2006 case of MAL Scaffolding.

You can read Mr Vessey’s full account of the JSL case here.

HMRC had also appointed external legal counsel to defend the case rather than calling on HMRC’s internal resources, which demonstrated that they were certainly keen on a successful outcome.

Given the introduction of IR35 reform in April last year which meant that, where the end user is in the public sector, the responsibility for determining status shifted to the public sector organisation - a win would certainly have served as a cautionary tale to any contractors who have or are currently operating in the public sector, as well as serve to prove themselves and the CEST tool as accurate.

Case Summary

The main strengths of the case were surrounding control and it was clear that JSL did have control over the services, much more so than would be afforded to an employee. This was confirmed by the two DWP witnesses who gave evidence at the Tribunal Hearing.

Additionally, there was evidence to support a complete lack of mutuality of obligation which the Judge also accepted and which was also supported by the DWP witnesses. Ian Wells had terminated the final contract with DWP early and upon immediate notice.

Although the right of substitution had not been exercised, Capita Resourcing, the agency through which JSL had obtained the contract with DWP, had confirmed that the substitution within the contractual terms was indeed practical and could be called upon and had indeed been utilised by others operating under similar terms.

DWP witnesses did not have much knowledge or experience of substitution taking place but they were aware of it and were aware that other contractors within the DWP had exercised such a right.

There was therefore evidence of a genuine right of substitution which could not be dismissed, and albeit not conclusive, the Judge indicated that this ‘shifts the balance away from employment.’

This begs the question why HMRC ploughed such resources into taking this case to Tribunal, when it ticked so many boxes in terms of IR35 compliance, particularly those set out in the case of Ready Mixed Concrete (1968), which was cited by the Judge, Jennifer Dean, in her Judgement.

The case, which is the second recent loss for HMRC, should serve as a warning to be mindful in their role as a public sector organisation (as set out in their own Charter) which is to “give you a service that is fair, accurate and based on mutual trust and respect.” Additionally, taxpayers should “expect HMRC to be impartial and increasingly effective.”

This was certainly not our experience of the way in which HMRC handled this case, and unfortunately our experience of late is that this is not an isolated incident.

HMRC have recently released a consultation document on reforming IR35 within the private sector which in the ‘Executive Summary’ (1.1) states; ”The legislation requires the individual working through a PSC to determine whether or not they should be regarded as employed or self-employed. It does not affect how people who are genuinely self-employed are taxed”

If only it were that simple.