Cornerstone IR35 cases: Jensal Software

With the IR35 reforms only six months away, contractors, recruiters and end clients are busy preparing for the change in responsibility and liability they will bring. Come April 2021, end clients will become responsible for determining a contractor’s IR35 status, while fee payers will hold all of the tax liability.

With these preparations in mind, we’ve been looking back at some cornerstone IR35 cases that have created precedents and demonstrated that HMRC’s own IR35 rules are often open to interpretation.

Today, we’re looking back at Jensal Software vs. HMRC, which saw an IT contractor successfully appeal his £26,000 tax bill.

Who was involved in the Jensal Software IR35 case?

Jensal Software is the limited company of IT contractor, Ian Wells. The case related to a series of contracts during the 2012/13 tax year, wherein Wells provided IT services through his PSC to the Department of Work and Pensions via a recruitment agency. HMRC claimed that Wells had been operating inside IR35 for these contracts and, therefore, owed them tax to the tune of more than £26,000.

Wells was defended by Kingsbridge’s very own Head of Tax, Andy Vessey who claimed the case could have been avoided had HMRC taken into account the ample evidence in the case. “HMRC ignored more than sufficient evidence which showed the working arrangements belonged outside IR35,” said Vessey. “It’s a real concern that HMRC either didn’t recognise this or chose to ignore the facts before the appeal progressed to tribunal.

“In my opinion, the reason the department allowed this case to go all the way was because the end client was a public sector body and they felt confident of winning; thus firing a warning shot across contractors’ bows. Thankfully, it blew up in their face instead.”

So, how did Wells prove that he was, in fact, outside IR35 and win such a cornerstone case? It largely came down to the three pillars of IR35: control, right to substitution, and mutuality of obligation (MOO).

No client control despite HMRC’s claims

HMRC’s claims that Wells did not have full control over his work were heavily flawed. They relied on the DWP’s assertions that Wells had to give progress updates over the course of the project, and the claim that he was expected to come into work each day.

Despite this, Wells demonstrated that he was, in fact, autonomous, which was confirmed by a colleague who worked on the project with him. He stated that Wells managed his own time, and that his workplace was only dictated by the demands of the project.

This led to Judge Jennifer Dean pointing out that progress updates could hardly be equated to the control an employee would be subject to and that this element of Well’s work could in no way be interpreted as employment.

Precedent-setting right to substitution

Quite a lot of the case focussed on the right to substitution clause in Jensal Software’s contract, which has led to this case setting something of a precedent in this area.

HMRC took issue with the fact that, although the clause was there, it was never exercised. They also challenged its legitimacy on several fronts:

• The DWP would need to check the credentials of any substitute provided by Wells.
• Wells had acknowledged he had put the clause into the contract simply to comply with the law.

However, Judge Dean was not satisfied that either of these diminished Wells’ IR35 status. In the first case, she pointed out that although there were some restrictions, the clause’s presence suggested self-employment.

As for the second point, she argued that the reason behind the clause’s existence didn’t cancel out the rights it bestowed. She didn’t give any weight at all to the argument that the clause had never been exercised, setting precedent for future cases by solidifying the fact that the clause’s existence is enough on its own.

HMRC failed to interpret MOO correctly

HMRC’s interpretation of mutuality of obligation (MOO) raised many eyebrows during the case. They argued that Wells had a contract of employment with the DWP on the basis of the “obligation on the DWP to provide work and for Mr Wells to perform that work in return for a consideration”.

The problem is that what HMRC flagged as MOO is actually the irreducible minimum of obligation required for an engagement to exist. In Jensal Software’s contract, it specifically allowed for the contract to be immediately terminated upon notice. In short there was no obligation to provide or accept continued work on either side.

In Judge Dean’s words, “Although there is MOO, 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.”

HMRC’s loss here is especially interesting because of its decision to omit MOO from its controversial CEST tool based on its assertion that all contractors are caught by MOO. This case demonstrates that that is not, in fact, the case.

The expert touch

The Jensal Software case demonstrates one thing particularly clearly: even HMRC may find it difficult to define what inside or outside IR35 may be. Vessey noted that much of HMRC’s evidence was based on questionnaire answers submitted by the DWP, but they did not seek any answers or clarification from Wells himself, which somewhat undermines their claims of impartiality.

As Vessey said at the time, “HMRC’s job is to check if the correct amount of tax has been paid, not seek evidence to support its own case.”

Now our Head of Tax at Kingsbridge, Vessey is able to lend his expertise to our customers and partners in many ways, one of which is working with our team of experts to assess contractors’ IR35 status. One way to access this service is through our IR35 Protect insurance.

Our Premium package offers unlimited IR35 status reviews so that you and your end clients can be confident in your SDS, while your fee payer can have the burden of liability lifted.

Call us on 01242 808740 to find out more.