HMRC have suffered another defeat in their latest IR35 challenge against an IT Contractor. The contractor in question, Ian Wells, was providing his IT services to the Department of Work and Pensions through his own limited company and subsequently received a tax bill in excess of £26,000. This was a result of HMRC assessing him as inside IR35 due to their belief that his work arrangements were more akin to a contract of service.

The outcome of this case has proved to be rather embarrassing from HMRC’s point of view as the ruling was largely based on fundamental indicators that suggested the contractual arrangements fell outside of IR35 (probably something HMRC should’ve realised before spending taxpayers money on pursuing the matter through the courts).

HMRC based a lot of their arguments on their interpretation that mutuality of obligation inherently exists in all contractor arrangements. However, Judge Dean stated: “Although there is mutuality of obligation it does not extend beyond the irreducible minimum, nor does it demonstrate that the relationship was one of a contract of employment. Moreover, the level of control falls far below the sufficient degree required to demonstrate a contract of service.”

Judge Dean also made reference to another key aspect of the contract regarding substitution where she noted that although Wells’ right to substitution was fettered, it still pointed away from an employment contract (contract of service). This was decided as there were no restrictions imposed on the clause, which Wells had the right to enact in any circumstance. The last decisive point made by Judge Dean related to the control element of the working arrangements where she assessed the amount of control present did not suggest a contract of employment.

Not only is this another blemish on HMRC’s record challenging IR35 cases, it asks more questions about the use of HMRC’s CEST tool (which is starting to look fundamentally flawed due to HMRC’s decision to omit an assessment on whether mutuality of obligation exists).