Recruitment consultancies are likely to question whether they can continue trusting the government over its handling of IR35 tax reforms in the wake of a dramatic victory for a contracting professional against HMRC this week.

HMRC had claimed that a contractor who had provided his labour through a personal service company (Jensal Software Limited) and through Capita to the Department of Work and Pensions between 28th May 2012 and 4th April 2013 was inside IR35. But the judge presiding over the case in the First-Tier Tribunal Chamber this week found that, contrary to the HMRC’s case, the worker’s contract was outside IR35.

The judge arrived at this conclusion principally because of the absence of sufficient control over the contractor’s working methods to justify an inside-IR35 determination, but also disagreed with the HMRC’s interpretation of mutuality of obligation and the right to substitution.

Seb Maley, CEO of the tax advisory consultancy for contracting professionals, Qdos Contractor (which represented the freelancer in this case), believes that a significant consequence of the ruling will be intensified scepticism amongst recruiters over whether they can trust the government’s IR35 expertise.

This is especially significant, he explained, as it is now the contract worker’s fee payer, frequently a recruitment agency, that will be held liable for any resulting penalties. He added:

“Despite HMRC implementing and enforcing the rules, this verdict shows they can’t accurately assess a contractor’s IR35 status. The Government is serious about clamping down on what they believe to be non-compliance, but worryingly, can’t recognise whether a contractor belongs inside or outside IR35.”

He called on HMRC to embark on a root-and-branch rethink of its IR35 strategy and simplify the regulations, adding: “Clearly, this is no time to extend public sector changes to the private sector.”

Also responding to the judge’s ruling was the CEO and founder of ContractorCalculator, Dave Chaplin. He wondered why HMRC brought this case against the contractor in the first place since the evidence against their argument – the existence of a completely legitimate right of substation, no control over working methods to speak of, and insufficient mutuality of obligation – was so compelling.

This is but the latest tribunal failure for HMRC. Just two months ago in March, a contractor won a case against the HMRC after the tribunal found that he had insufficient control over his working methods to warrant an inside-IR35 designation, and also had no access to employment rights to justify deeming him an employee.

HMRC have recently confirmed that they have no reliable evidence for the accuracy of their own self-assessment tool, CEST, which contractors are expected to use to reach an IR35 determination.

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