The much anticipated ruling on the Jensal Software v HMRC IR35 case has seen HMRC suffer a crushing defeat.
IT contractor Ian Wells had contracted with the Department of Work and Pensions (DWP), but his representation successfully appealed the tax bill of over £26,000, leaving HMRC with a fair amount of egg on their face.
Following the ruling, public and expert opinion on the matter has seen a wave of criticism flow HMRC's way given the known facts. Not only this, the timing could not be worse for HMRC. They are just about to launch their much anticipated IR35 consultation. Receiving such a sledgehammer blow at the current time has certainly left them licking their wounds.
But whilst the latest verdict come as a victory for the ongoing case against ill advised IR35 reform, it has left HMRC with a myriad of questions to answer.
HMRC decided to fully pursue the matter in an attempt secure the win. To do so, they appointed Counsel to represent them - not a cheap option by any means. The taxpayer foots the bill for this and questions need to be answered as to what the final cost was, especially when compared to the amount of tax at stake.
Ian Wells has now been investigated twice by HMRC - something almost unheard of. Originally investigated in 2004, this raises concerns over how HMRC target contractors. Is Wells just unlucky...?
The ethical approach of HMRC has been questioned, given where a fair chunk of their evidence emanated from. HMRC relied on a raft of answers obtained from a questionnaire they only issued to the DWP. By not looking to obtain any input from Wells, the requirement for HMRC to be impartial is without doubt brought in to question.
When will HMRC understand MOO? Their obsession and thinking around it now borders on the ridiculous. Constantly arguing that MOO exists in every contract, they ride on oblivious to the 'irreducible minimum' that is accepted in every contract. HMRC continue to ignore this and insist it forms part of the argument that a contractor is inside IR35.
The logic behind the CEST tool, which takes MOO as a given, and the hundreds of thousands of issued IR35 determinations as a result, is now wobbling like a brick on blancmange. Quite simply, HMRC has built an online tool that ignores case law and is fundamentally flawed to its core.
The substitution clause in the contract between Jensal and the DWP was heavily questioned by HMRC. The clause itself was watertight, but as it was not exercised, HMRC queried its legitimacy. Judge Dean ultimately ruled that not exercising it bore no weight, avoiding setting a dangerous precedence. The significance of such a decision will no doubt be brought up in future cases.
The whole approach taken by HMRC is under serious scrutiny given their decision to pursue the case. Multiple counts of ignoring strong evidence from the contractors side will no doubt lead to accusations that they were pressing ahead in support of their own IR35 agenda and were not acting impartially.
HMRC chose to ignore the facts or more concerning still, they simply don't understand them. As to where HMRC now take IR35, serious decisions will need to be made. Whichever way you look at it, the last remaining drips of confidence in HMRC are seeping quickly away.
The full ruling can downloaded from the ContractorCalculator website by clicking here.