New IR35 Win for the Contractors

//New IR35 Win for the Contractors
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By David Hughes

An IT contractor recently won their case against HMRC for incorrectly claiming their work was within IR35. This is the second win for a contractor in an IR35 case in as many months.

The case

The IT contractor had been working freelance for around 25 years and has been subjected to an HMRC IR35 inquiry before. This case was heard 4th-6th October 2017 and the judgment has been released.

Mr Wells, the IT contractor, performed a series of short contracts in 2012/13 for the department of work and pensions (DWP), each lasting around 3 months. The DWP contracted with Capita and Mr Wells performed the work through his limited company, Jensal Software Ltd (Jensal).

HMRC claimed the DWP contracts fell within IR35, and billed Wells with a tax bill of £26,669 due under the IR35 rules.

A MOO’t point

The “Mutuality of Obligation” clause applied somewhat to the contract between DWP and Jensal, however the judge deemed that “the mutuality of obligation does not of itself demonstrate a contract of services” in the case of this particular contract.

The CEST, which is the tool HMRC have created for contractors to ascertain their employment status, doesn’t even test for the existence of MOO. HMRC claim that this is because MOO is assumed to be a part of all public sector contracts, so there is no need to test for it. It will be interesting to see how cases that are affected by the MOO clause affect future development of the CEST and any other IR35 assessment tools that may be introduced.


HMRC claimed that Wells was an integral part of the DWP team and was subject to supervision by DWP managers. These managers were able to give evidence which proved Wells was able to carry out the work as he saw fit and was not obliged to attend DWP meetings. It was also clear that the DWP could not move Wells to different tasks without the approval of Capita.


The contract between DWP and Capita did include a substitution clause, however, HMRC argued that the clause was too vague to be considered effective and that permission from the DWP would have been required to send a substitute. There was also a right of substitution clause present in the contract between Jensal and Capita.

The decision

The decision came down to the relationship between the DWP and Mr Wells, which consisted of a hypothetical contract between the two, formed by the chain of three contracts (DWP-Capita, Capita-Jensal, Jansal-Wells).

The conclusion was that the hypothetical contract did not constitute employment and thus IR35 did not apply.

This judgement shows that the results from the CEST should be taken with a grain of salt and contractors should seek professional assistance when assessing whether a new contract is in- or outside of IR35.

2018-06-01T16:58:50+00:00 June 1st, 2018|IR35|Comments Off on New IR35 Win for the Contractors