Contractors working through personal service companies who believe that they are exempt from IR35 should review their situation following the High Court’s ruling on the Dragonfly Consulting appeal, warns Jon Henderson of Menzies’ employer solutions team.

Dragonfly Consulting, a service company set up by IT consultant Jon Bessell, had fought an HMRC ruling that work done for the Automobile Association fell under the IR35 regime, which meant that it owed £99,000 in unpaid taxes and NI contributions.

The facts of the case and the basis of the appeal will apply to many contractors who think they are exempt from IR35. For example, Mr Bessell provided his own equipment and training. He also had a contractual right of substitution, which allowed him to provide a replacement worker in his place. However, the judge presiding agreed with HMRC special commissioners and found that Mr Bessell’s IR35 defence was weak. The relevant factors were that

• The engager (the Automobile Association) had a certain degree of control over the worker, who worked as part of a team in its business and under the control of an employed team leader.
• Although the right of substitution existed contractually, it was not reflected in real life.

The High Court decision in our view is not surprising. The relevant factor in deciding these matters is where control of the business really lies, and the decision regarding the right of substitution is supported by other recent case law. HMRC is increasingly of the opinion that an individual must be in business “in their own account" to meet the minimum requirement for self-employed status.

This is an important ruling, and individuals who work through a service company should be aware of the implications. If they are using an "IR35-proof" contract, they should ensure that the contract reflects the true working practices. Ideally, they should obtain HMRC clearance.

For further information, contact Jon Henderson on jhenderson@menzies.co.uk