IR35IR35, as with all legislation, is a constantly evolving beast. With every new case comes new case law that contractors, freelancers, and employment experts can use to try to stay one step ahead of HMRC’s hamfisted enforcement of the much-maligned anti-avoidance rules.

Perhaps the most noteworthy development in the story of IR35 last year was the revelation that HMRC, in a moment of startling self-awareness, admitted to enforcement problems and committed, through the newly-formed IR35 Forum, to improve the way IR35 is administered. Although little progress has been made by the IR35 Forum so far, HMRC’s admissions and promises to improve were both welcomed by contractors and freelancers.

In January 2011 one of the lengthiest disputes in the history of IR35, spanning no less than seven years, was finally settled in favour of the contractor. Mark Fitzpatrick, who contracted for Airbus, was found to be outside IR35 by virtue of a lack of mutuality of obligation, resulting in an embarrassing climbdown for HMRC. The case was the first in a string of high-profile IR35 defeats for HMRC in 2011.

In early March, at the behest of the Government the Office of Tax Simplification published their Small Business Tax Review, and offered three options for the reform of IR35. Those options were, somewhat predictably:

  • Keep IR35 unchanged and improve enforcement
  • Introduce new, clearer tests to help contractors self-assess their status
  • Scrap IR35

Disappointingly, when it came time for the Budget George Osborne chose to keep IR35, but committed to improve enforcement (which resulted in the aforementioned formation of the IR35 Forum).

HMRC has since floated the idea of a “segmentation model”, which would place contractors in one of three risk categories (low, medium and high), although has refused to give information of how one would ensure they avoid the “high risk” category, making the information rather moot.

Later in the year, a Tribunal decision in the case of Autoclenz Ltd v Belcher and Others threw contractors a curveball as the Supreme Court ruled that the contractors employed by Autoclenz were in fact employees, even though their contracts included mutuality of obligation and substitution clauses, which are generally acknowledged as requirements to ensure a contractor is outside IR35.

This in effect stripped away the contractual protection many contractors and freelancers have taken for granted, as a contract would now be deemed invalid if it did not accurately reflect the reality of their relationship with their client.

The Autoclenz decision wasn’t the only surprising IR35-related ruling of 2011 though. In December a Tribunal judge ruled that a contractor, John Spencer of JLJ Services Ltd. was both inside and outside IR35 during his time contracting with his client, Allianz. Up to 2003, Mr Spencer was deemed to be outside IR35, however after that point, the judgement deems, “there were various indications that the relationship did then change.”

This case highlighted the fact that IR35 decisions are always made on a case-by-case basis, and a contractor’s history with a client cannot be taken into consideration. It also brought into play the concept of employment status altering mid-contract – another pitfall contractors must now be aware of.

So, as we begin the new year IR35 is still as much of a mystery to many as it was at the beginning of last year – and those who thought they understood it now have a couple of complicated new rulings to get their heads around. There is some hope on the horizon, though. David Cameron recently hinted that his Government is looking at implementing a General Anti-Avoidance Rule in March’s Budget, which would render IR35 obsolete.

We’re keeping our fingers crossed.

Photo by Alan Cleaver – CC