http://www.bailii.org/ew/cases/EWHC/Ch/2008/2113.html

The High Court in Dragonfly Consultancy Limited v HMRC has sent a warning shot across the bows to consultants providing services to a sole organisation. The IR35 legislation aimed to ensure that individuals who should properly pay tax and NIC as employees cannot, by means of a corporate structure, avoid being taxed as employees. In the Dragonfly case, Mr Bessell was 50% owner and director of Dragonfly and provided IT services, via an employment agency, to the AA. In a three year period he worked almost exclusively for the AA on the testing aspects of three IT projects. The Special Commissioner considered that Mr Bessell operated under the AA’s control, had only one other minor client and was ‘integrated into the AA’s business, and had a role similar to that of a professional employee’. Mr Bessell appealed to the High Court who upheld the Special Commissioner’s decision. Mr Bessell argued that his agreement with the AA included a right of substitution (ie that he could supply another worker in his stead). The High Court questioned whether this was simply window dressing as Mr Bessell effectively operated alone and the AA had the right to refuse substitution. The intention of the parties was irrelevant and Mr Bessell’s work was found to be subject to a substantial degree of supervision and quality control. For tax and NI purposes he was found to be an employee for the relevant period and was left with a hefty tax bill of nearly £100,000. It follows that parties entering into an agreement that they intend not to equate to an employment relationship for tax purposes need to consider all aspects of the arrangement. There should be a clear unfettered right of substitution as well as ensuring that the consultant does not become too integrated within the company.