Dragonfly case brings back spectre of IR35

An IR35 case was lost last week as Dragonfly Consulting was served a bill for tax avoidance totalling over £99,000. As Director and Shareholder John Bessel prepares to empty his piggy bank, the rest of the Contractor community is fearing its impact on future IR35 cases.

This case first came to light in January of this year when Special Commissioner, Charles Heller fined Bessel £90,000 for lost tax and National Insurance contributions during his contract with the Automobile Association. However, after Bessel disputed the ruling it was taken to the high court where a verdict was reached last week that will see him liable for the full amount.

HMRC claimed that the director of Dragonfly Consulting had been within IR35 whilst working on a contract for the Automobile Association because he had reportedly been an employee of the company rather than an external contractor. Supported by the Professional Contractors Group (PCG) Bessel argued against the ruling, claiming that Hellier had judged incorrectly on four key areas including substitution, control, intention of parties and worker status which combined to show that he was caught by IR35 during his time at the Automobile Association.

So what went wrong for the Dragonfly case?

Substitution
The contract states that whilst working for the Automobile Association John Bessel had to carry out the work agreed and that he would only be able to find a substitute in specific circumstances and with the approval of the Automobile Association. HMRC claimed that this points towards Bessel being an employee of the company rather than an external contractor who would not have had to gain approval for substitution.

Control
Hellier concluded that there was evidence to suggest that Bessel had been under a level of supervision and quality control that was unusual for an expert contractor and hinted towards him being an employee. This was further backed up by witness statements that he had received regular appraisals and monitoring during his three year contract, something that is seen to be unusual for a contractor to receive.

Intention of the parties
It was found that there was not significant evidence to suggest whether or not it had been the intention of either party that Bessel be an employee or a contractor and therefore Bessel's objection to the ruling on this point was dismissed.

Worker status
Bessel argued that he was neither employed nor in business on his own account and therefore he fell into an intermediate group not covered by IR35. However, Hellier ruled that this did not apply to this case as there was enough alternative evidence to suggest that Bessel fell under the employment net.

How will contractors be affected by this case?
Whilst this ruling will have an obvious affect on John Bessel and his family, it may have much wider consequences for the contracting community as a whole. There is always a danger that a case such as this will crop up again and again as an example to be used in judging future cases. The PCG funded and supported the Dragonfly defence based on their concerns over the future implications of the case. John Brazier, managing director of the PCG said "This is a potentially massive blow to freelancers…this case threatens the long-established defences against IR35".

It is now more important than ever to ensure that your contract is rock solid and would stand up to questioning from HMRC on the topics such as substitution and control that were the down fall of Dragonfly Consultancy Ltd. It is important to have your paperwork completed at every stage as one of the problems for Bessel was that he added a clause to the contract about his right of substitution at a later date. This acted as a red flag to HMRC that he was concerned about IR35 implications.

If you are unsure about your position with regards to IR35 then it is important to clarify this with your accountant as it could have serious implications in terms of your tax and national insurance contributions, which in turn can affect your pension.

Dragonfly - the pension solution

As mentioned before in Planet Contarctor, company pension contribution is one of the few non-contenscious tax reduction measures still available, irrespective of a Contractors status. Even if you are judged ultimately to be within IR35, HMRC allow this method of renumeration for the Director, over and above the 5% expenses rule.

To discuss comapny pension investment speak to Andrew Gains on 0845 062 8888 or email andrew@contractorfinancials.com

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