Self employed contractors should take notice of landmark IR35 ruling

In a landmark court ruling last week, a professional contractor lost his IR35 appeal in the High Court. The judgement shows, once again, how important it is for self employed people to be aware of the IR35 rules and to take professional tax advice.

Dragonfly Consulting has been hit with a £99,000 tax bill after its director was found to have been "within" the IR35 rules during an IT Contract with the Automobile Association (AA). Rather than being viewed as "self employed" for tax purposes, the director was found to be "employed", despite running his business via a limited company.

In early 2008, the Special Commissioners agreed with HM Revenue & Customs that the director of Dragonfly Consulting, John Bessell, should be viewed as being "employed" for IR35 purposes, when he was working for the AA.

At the Commissioners' hearing, Bessell was viewed as being "part and parcel" of the organisation, which is a strong pointer to being caught by the IR35 rules.

At the hearing, it was acknowledged that the contractor had a limited right of substitution, but overall he was effectively "part and parcel" of the organisation - a strong pointer towards being caught by IR35.

Despite paying for his own training and equipment, Mr Justice Henderson said that such indicators of "self employment" were not strong, and as a result, his contract would not fall outside the IR35 rules:

"Overall I find nothing which points strongly to the conclusion that Mr Bessell would have been in business on his own account; by contrast when I stand back and look at the overall picture I see someone who worked fairly regular hours during each engagement, who worked on parts of a project which were allocated to him as part of the AA's teams, who was integrated into the AA's business, and who had a role similar to that of a professional employee."

After the hearing, Mr Bessell said: "I am devastated by today's news; not only does it affect my family and me, but all the other freelance professional consultants who are trying to earn an honest living. I was never an employee of the AA and I simply cannot understand how the High Court has reached its decision. It's a travesty of justice."

Martin Hesketh, MD of accountancy firm, Brookson, said:

"Despite the huge legislative shifts the contracting industry has experienced in recent times, this case demonstrates that the IR35 legislation remains key for self employed contractors in determining employment status. We would always advise that contractors seek professional advice as to their IR35 status for each assignment in order to minimise the risk of unexpected tax bills."

• You can read the full Dragonfly Judgement here.
• For further reaction to the case, try our sister site, Contract Eye.