Concerns expressed over contractor tax ruling

8 September 2008

A High Court judgement in the tax case of a consultant has been described as a “potentially massive blow” to contractors in the UK.

The case involved Dragonfly Consultancy, which had been fighting against a substantial tax demand from HM Revenue and Customs (HMRC).

HMRC had questioned the relationship between Dragonfly, owned by Jon Bessell, and the AA.

The issue revolved around whether Mr Bessell was or was not an employee. His case had been supported by the Professional Contractors’ Group (PCG).

However, the High Court judge presiding on the case ruled in favour of HMRC, a decision that John Brazie of the PCG claimed was “a massive blow to freelancers throughout the country” and one that “threatens the long-established defences against IR35”.

The judge, Mr Justice Henderson considered that Mr Bessell’s business was in fact an intermediary, even though he had paid for training and equipment himself, and so fell within the IR35 regime.

The contract between the client and the agent, it was ruled, meant that while Mr Bessell could choose a substitute supplier, the client had the power to agree or not to agree with any alternative consultant.

It also meant that Mr Bessell was under the direct supervision and control of AA project managers.

The PCG said that the ruling will have a direct legal bearing on the way that contracts between contractors and clients are drawn up in the future.

However, Amie Norton, a consultancy expert, said that the judgement does not place tens of thousand of contractors at risk of being inside IR35 as was originally feared.

Norton said: “The key lessons from this case are the right to substitution, control and the intentions of the parties. The interpretation of substitution has narrowed, but this can be clarified by contractors with their clients.”

Norton added: “Where Mr Bessell fell short of having an unfettered right to substitution was in asking his client for approval.”