Important Case Study for Contractors in IR35 – Jensal Software vs HMRC

Jensal Software Ltd’s win over HMRC in the IR35 case comes as a huge relief for the contractors in the public sector who are pressurized by HMRC to pay back taxes. This win for the contractor highlights some of the important issues that were raised by us before off-payroll was implemented-

• HMRC might try to misuse its power in its quest to collect taxes.
• Taxmen’s incorrect interpretation of mutuality of obligation (MOO), especially in this case.
• IR35 rules can be a bit blurry for contractors and HR managers. If HMRC loses out on IR35 cases it questions not only their integrity but how much of clarity is there in the rulebooks of IR35.
• Also, if HMRC is itself not able to understand its own laws, then how can they expect the Contractors and HR managers, employers to make correct decision regarding IR35.
• This rule has put many self-employed into a fear who are the backbone of UK’s economy. Although HMRC may have won certain cases, like against Christa Ackroyd, but it has also lost a few against contractors.

Jensal Software Ltd vs HMRC

Ian Wells, director of Jensal Software Ltd, incorporated in the year 1994, was penalized by HMRC for £26,000 in tax dues for the year 2012/2013 while providing his work through Capita (a recruitment agency) to Department of Work and Pensions (DWP) under the tax laws. Ian Wells went on to challenge this decision and won the case. HMRC’s argument was that Ian Wells did not have full autonomy over his work as he was required to come to work every day. Further he was also required to give feedback on the progress made everyday. However, Judge Jennifer Dean, who was hearing this case was able to distinguish between the employment contracts when Wells was able to establish that he had full autonomy over his own work and also did work off-site regularly under his own wish. The degree of control exercised in this case over Wells did not constitute a contract of employment. The other point mentioned in this case was about the much dreaded substitution clause. The substitution mentioned in Wells contract was pretty airtight and hence HMRC in the first place should not have had challenged it.

Experts are baffled by HMRC’s decision to take this into the court especially after all the rules were clearly pointing that Wells contract was independent of any obligation. He was a contractor and not an employee. Right of substitution, less control, lack of mutuality of obligation (MOO) all these points should have been well considered by HMRC before going for tribunal.

Future implication of this decision

This decision is surely going to give contractors a lot of confidence and a set back to HMRC. After all, the points mentioned by the Judge clearly indicated that there was no way the case falls under IR35. On the substitution side, weightage was given to the existence of the right rather than actual substitution which may form basis for future cases. Dragging such cases into the court costs HMRC resource and money, money that is being paid by us – the taxpayers. Although there might be genuine cases where an employee might be trying to save taxes by working under PSC, but it does not mean that HMRC will start knocking on everyone’s door whenever it finds minimal amount of evidence. IR35 in itself is very complex and caution has to be exercised when HMRC uses it. Otherwise, there will be several more similar cases where the HMRC not only loses a tribunal hearing but also the public respect.

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