Mr Wells vs HMRC
The recent judgement on the IR35 case of IT Contractor Mr Wells, highlighted some very important points. Mr Wells avoided the £26,000 HMRC claim for unpaid income tax and national insurance contributions by successfully proving he was working under a contract for services and not an employment contract with the client DWP for 11 months.
The judge ruled that even though there was a mutuality of obligation it didn’t, in her view, extend beyond the irreducible minimum and it didn’t demonstrate the relationship was one of a contract of employment. Moreover, it was evident that Mr Wells was subject to substantially less control than the employees working at DWP and the level of control was low enough to sufficiently demonstrate a contract for services.
Being aware of the key factors which the judge flagged up as shifting the balance towards a contract for services and including these clauses in your contracts could protect you if you are ever investigated. So let’s explore the influential factors that the judge flagged up in more detail:
Mutuality of Obligation (MOO)
- Each contract lasted a short duration. The break between the penultimate and final contracts of approximately two weeks indicated that there was no contractual obligation for the DWP to provide continuous work for Mr Wells.
- If DWP chose to abandon the project under which Mr Wells was working, there was no contractual basis upon which Mr Wells could demand any further work.
- Mr Wells was under no obligation to perform the work and in fact Mr Wells terminated the final contract when a better offer presented itself.
- Mr Wells’ contract for services included a substitution clause which meant that if Mr Wells had simply decided that he no longer wished to work on the project, he could have sent someone else in as a substitute for him. Even though this didn’t actually happen, the fact that Mr Well’s contract recognised the possibility of substitution was enough evidence.
- Mr Wells utilised his skills to decide what was needed, how those needs could be met and the timescales in which the task could be completed.
- Mr Wells decided where to work, which was dependent on the nature of the task in hand.
- The internal customer policies limited their control since Mr Wells could not be directed to undertake tasks outside the scope of the engagement. In addition, his contract required any variation to the terms of the agreement to be in writing.
- The control element to which Mr Wells was subject was substantially less and clearly distinct from that over employees.
- Mr Wells did bear some financial risk since there was a contractual obligation to remedy any defect at his own expense.
- Mr Wells was supplied with a DWP computer for data security reasons & therefore this was considered a neutral factor which didn’t impact the judge’s decision.
- Mr Wells was obliged to take out public liability and professional indemnity insurance cover. The judge did not find this to be a particularly strong indicator, but it did tip the balance slightly towards a contract for services.
Considering the Judge’s ruling above, we would recommend that the following factors should be included in your contract for services:
- Mutuality of obligation – include clauses in your contract which make it clear that the client company is not obligated to provide you with continuous work or replacement work, if the project you are working on is abandoned.
- Substitution – include clauses that clearly state that you can supply a different person to undertake your work if you are absent and it is your responsibility and discretion to choose to cover your absence.
- Control – retaining more control over your work than an employee would have is crucial if you ever need to prove that you are not working under a contract of services. Include clauses that you control things like timescales, locations, how you will utilise your skills at your discretion, etc.
- Financial risk & personal liability – include in your contract for services that you have a contractual obligation to remedy any defect in your work at your own time and expense.
- Contractual changes – include a term in your contract which states that any changes to your role need to be agreed in writing with you first.
If you would like to double check your contract, then try out our free online IR35 review of your contract here : https://pillowmay.ir35testing.co.uk/TakeTheTest