In a ruling that may leave PAYE umbrella contractors breathing a sigh of relief that they don’t have to worry about IR35 investigations, a freelance contractor has been deemed to have worked both inside and outside the much-disliked legislation. The judge’s decision will leave many freelancers who work through their own limited companies carefully scrutinizing their contracts at renewal and extensions stages in particular.
IT contractor John Spencer worked through his limited company JLJ supplying services to a firm called Allianz for seven years. Unfortunately for him he came to the attention of HMRC, whose review concluded that he owed no less than £141,000 in unpaid income tax, National Insurance Contributions and penalties. The Revenue maintained that he was covered by IR35 throughout the time he worked for Allianz.
Mr Spencer appealed, and the outcome was the split decision at the recent Bristol Tribunal. Judge Howard Nolan ruled that for the first three years of his work with the firm, Mr Spencer was not inside IR35. However, the nature of his relationship with the company then changed, and he moved from completing specific projects to fulfilling anything the client requested of him. At this point, the judge maintained, Mr Spencer took on the characteristics of an employee. Despite this switchover, the judge conceded that it was “not easy to define” the precise point at which Mr Spencer’s role changed.
The ruling has halved the amount of money he would have been forced to part with had HMRC’s case been upheld, but has nonetheless highlighted the need for limited company freelancers to take great care over confining the terms of their contracts to specific projects.