Ian Wells was working for the DWP providing business analyst services through a personal service company, Jensal Software Ltd, via an agency, Capital Resourcing Ltd, between 28 May 2012 and 4 April 2013 [Jensal Software Ltd and HMRC, TC/2017/00667].

Wells worked on a project which formed part of DWP’s flagship universal credit rollout, which involved him attending a DWP office and travelling to different sites. He had the use of a secure DWP laptop and the tribunal heard evidence of meetings between Wells and DWP managers on the project.

HMRC concluded there been a direct contract between Wells and the DWP during the period of engagement, so it represented a contract of service, not a contract for services. As a result Wells was asked to pay £14,658 in income tax and £12,011 in respect of Class 1 NICs arising from the application of the IR35 intermediaries legislation.

The tribunal heard that HMRC had reviewed two contracts involving Jensal Software during the period of enquiry – the DWP one, and a similar engagement with Lloyds Bank. HMRC agreed that the latter fell outside of the intermediaries legislation, while Wells contended that the contract with the DWP also did.

The tribunal judge stated: ‘The issue for me to determine is whether Mr Wells personally performed or was under an obligation to perform services for the DWP and whether the hypothetical contract between Mr Wells and the DWP would have been a contract of services or a contract for services.’

The judge looked in detail at three conditions determining employment status. The first is commonly known as ‘mutuality of obligation’ (MOO), the second relates to the degree of control and the third is a negative condition, i.e. where it is shown that there is: ‘requisite mutuality of work-placed obligation and the requisite degree of  control, then it will prima facie be a contract of employment unless, viewed as a whole, there is something about its terms that places it in a different category.’

In evidence Wells said he did not set work hours as the work was goal orientated and focussed on delivery to projected timescales, and  explained that he took the initiative in terms of the way forward and determined how best to discharge consultancy across the project. There was liaison with the DWP management regarding progress and task identification, but he was the driving force in setting out the tasks for completion and timescales.

Wells also stated that he had a right of substitution which was confirmed by Capita. He explained that although in practice it was not common within the sector to appoint a substitute and, in his view, deeming the right as fettered on the basis that the end client needs to approve it is completely unrealistic within mainline IT given the specialist/expert nature of the appointment. However, he indicated this element had been included in his contract precisely because of the requirements of IR35.

On the question of MOO, the judge stated: ‘The essence of the relationship was that there was no continuing obligation on the part of the DWP to provide work; if it chose to abandon the project there was no contractual basis upon which Mr Wells could demand further work.

‘lthough there is mutuality of obligation it does not, in my view, 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.’

On substitution, she stated that oral and written evidence supplied showed that: ‘although the question of substitution did not arise, the hypothetical contract recognised the possibility of substitution which shifts the balance away from employment.’

As regards control, the judge said: ‘The level of control exercised did not go beyond that which was usual for an independent contractor. In balancing all of the factors I conclude that Mr Wells was not subject to the degree of control which would be necessary to constitute a contract of employment.’

The judge also pointed out that each contract lasted a short duration. The break between the penultimate and final contracts of approximately two weeks indicates that there was no contractual obligation for the DWP to provide continuous work.

The judge said: ‘It was also clear from the evidence of all of the witnesses that Mr Well’s engagement did not extend beyond the specific project in respect of which his skills were required.

‘The position as borne out by the facts is that there was a period during which one contract ended and the DWP was under no obligation to continue to offer a further contract. No further work was offered for a short period. Moreover, Mr Wells was under no obligation to perform the work and in relation to the final contract Mr Wells terminated the final contract when a better offer presented itself.’

The judge concluded that Wells’ appeal should be allowed and that he was not caught by the IR35 legislation.

The judge said: ‘Looking at the overall picture and making a qualitative assessment I am satisfied that the relationship is consistent with a contract for services not a contract of service. In reaching this decision I have made a value judgment on the features in this case; some of which are neutral and some which provide a more compelling indicator that the hypothetical contract would be one for services.’

Separately, lawyers for Wells raised an issue regarding his treatment by HMRC, which the judge said was beyond the scope of the tribunal. Wells, who said he had operated as an IT contractor for some 25 years, had been subject to an HMRC IR35 investigation in 2003, which also failed to show he had breached the rules.

HMRC’s defeat at this tribunal follows on from a similar case in March involving a personal services company (PSC) called MDCM Ltd used by a contractor working in the construction industry, which also went against the tax authority. However, HMRC was successful in the first of a series of challenges to the use of PSCs by media personnel working for the BBC, when presenter Christa Ackroyd lost her appeal and now faces paying some £400,000 in back taxes.

The outcome of the case throws uncertainty into the IR35 framework as the government issues a consultation on extending IR35 rules to the private sector.

 ‘This case is a second loss for HMRC, after MDCM. On one view, these decisions do no more than demonstrate the importance of the particular fact pattern, case by case. But they may be drawing out too an underlying uncertainty on where, in law, the IR 35 boundary line actually lies,’ said Mark Cawthron LLB CTA, tax specialist at Croner-i Tax & Accounting.

An HMRC spokesperson said: ‘HMRC will carefully consider the outcome of the tribunal before making a decision on any future course of action.’

Report by Pat Sweet