Public sector contract was not caught by IR35

There has been a lot of confusion following the changes to IR35 and how it is implemented in the public sector. Worried about accountability many public sector organisations appear to have automatically re-categorised individuals as employees by default fearing reprisal. However, a tax tribunal has recently decided that a public sector contract was not caught by IR35. 

Public sector contract was not caught by IR35

In the case of Jensal Software Ltd v HMRC  the Tribunal determined that a public sector contract was not caught by IR35. This was because the level of control exercised by the DWP (with whom the company had contracted) was insufficient to demonstrate that a contract of service existed and IR35 applied.

What are the IR35 rules? 

Put very simply the rules for IR35 impose PAYE deductions on a personal service company (or PSC for short).  They apply where HM Revenue consider the arrangements between an individual and the end client are such that, if they were engaged directly, the individual would be regarded as an employee. 

If these rules apply then The PSC must treat any amounts received as income of the individual concerned and operate PAYE.

Public sector contract was not caught by IR35 - the facts of the case

Between May 2012 and April 2013 Mr Wells provided services to the DWP firstly via an agency and then through his own company  Jensal Software Ltd. These services were carried out as a series of short-term contracts. He was an experienced contractor and had already been through an IR35 enquiry with HM Revenue. 

The working practices of his role within the DWP were as follows:

  • He was paid a day rate with no fixed hours of work
  • Mr Wells worked at various sites exercising his own discretion
  • Reporting to a DWP manager monthly
  • Set his own deadlines
  • Had the right to appoint a substitute subject to DWP approval
  • Was not entitled to holiday or sick pay, pension or any other benefits 

Mr Wells decided to terminate his final contract with the DWP without reason and suffered no adverse repercussions from the DWP. 

HMRC concluded that this arrangement was caught by IR35 and imposed a tax bill of over £26,000 on Mr Wells who appealed against their decision.

Public sector contract was not caught by IR35 - the decision outlined

The presiding judge great care to carry out the relevant tests and how they should be applied to Mr Wells. After considering the facts she concluded that Mr Wells' contract was not caught by the IR35 legislation. The reasons for this decision were as follows:

  • Although Mr Wells provided his services for payment the terms of his engagement were such that he received a daily rate irrespective of hours worked. He worked on one specific project, and there was no obligation for the DWP to offer further work going forward.
  • Despite requiring the DWP’s approval for the right of substitution, it was not restricted to specific circumstances.
  • Mr Wells was an expert in his field Therefore any instructions issued to him were limited. Mr Wells used his own skills and experience to determine what was needed, how those needs could be met and the timescales involved. Because of this lack of control it could not be proven that Mr Wells was an employee subject to the DWP's direction. 

This case is of particular interest to contractors as this arrangement was with a government department. If Mr Wells had  performed these contracts after April 2017 he would have been subject to the new rules. The DWP would therefore have been required to assess his employment status. 

However, this case proves that just because someone contracts with the public sector it does not automatically follow that they are caught by IR35. Perhaps this will give the public sector a reason to re-think their actions?

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