In a particularly relevant IR35 judgement, HMRC v Jensal Software Limited has dealt a huge blow to both the credibility of HMRC’s IR35 tool (or CEST) and the modus operandi of HMRC in their new consultation to roll out the public sector off payroll changes to the private sector.
In her ruling, which went in favour of the contractor, Judge Jennifer Dean reaffirmed that HMRC were incorrect in their views of how Mutuality of Obligation (MOO) applies and that:
“Mutuality of some kind exists in every situation where someone provides a personal service for payment, but that cannot by itself automatically mean that the relationship is a contract of employment: it could perfectly well be a contract for freelance services.”
Mutuality of Obligation has long been a key determinant for IR35 status. HMRCs CEST tool, incorrectly, assumes that MOO is present in every contractual relationship and as such, it concludes a contract for employment service (as opposed to ‘of service’). Whilst this bias has eroded confidence in the use of CEST, the judgement effectively states HMRC will need to reconsider their understanding and application of one of the critical pillars of IR35 that Parliament set out back in 2000.
A reading of the 36-page judgement will encourage the contractor community that IR35 is not the catch all legislation that HMRC wish it to be, and that freelancers are perfectly entitled to be outside of IR35 and therefore not in an employment relationship.
This contrasts significantly with HMRC’s claim that only 10% of the estimated 1/3rd of all workers are applying the law correctly as described in their new consultation aiming to forcibly apply the laws in the private sector. Nasa Group, who specialise in assisting our clients determine their IR35 status believe that the view of HMRC is incorrect and that those contractors who have independent reviews and IR35 appraisals are applying the law correctly.
Our professional advice to all freelancers is that IR35 is a tax assessment that must be made independently like any corporate or personal tax, and the details of the appraisal must be kept should HMRC raise an inspection. This Jensal judgement has concluded 6 years after the contract was carried out by the worker and has taken significant time and cost to handle.