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Freelancers might be taxed as employees after High Court ruling

IT contractor hit with £99,000 bill

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An IT contractor has been hit with a £99,000 tax bill after the High Court ruled that he should be taxed as an employee of the company he undertook work for.

Jon Bessell, 50 per cent owner and sole director of Dragonfly Consulting, carried out work for motoring organisation AA for three years until 2003.

Bessell is an IT systems tester and worked almost exclusively for AA in the three year period, providing his services as Dragonfly Consulting via an agency for IT contractors, DPP.

A set of rules known as IR35 were introduced by Inland Revenue in 2000 to ensure that individuals were not using a corporate structure to avoid paying tax and national insurance as individual employees.

Bessell was deemed by Inland Revenue to be an employee of the AA according to the IR35 rules.

The Special Commissioner had looked at the fact that Bessell operated under the control of AA, had only one other client who provided only a little income and was "integrated into the AA's business, and who had a role similar to that of a professional employee".

Bessell appealed to the High Court, arguing that the Commissioner had made legal errors in the assumptions made about the notional contract imagined between Bessell and the AA; that the intentions of both parties were not, as the Commissioner deemed them, "irrelevant", and that there exists a status between being in business and being an employee, and that is the state of being "a worker".

The High Court found that the relationship was essentially that of an employee and employer. Mr Justice Henderson found that Bessell's work could not be substituted for another's; that the control, appraisal and assessment of his work undertaken by AA manager's was like that undertaken in relation to an employee; that the parties' view of what they wanted the status to be was indeed irrelevant; and that Bessell fell "on the employment side" of the dividing line between employee and non-employee.

Mr Justice Henderson upheld the Special Commissioner's view that Bessell should pay the tax and national insurance contributions he would have been due to pay as an employee, which amount to £99,000.

Bessell released a statement through contractors' body the Professional Contractors' Group (PCG) saying he was "devastated" by the ruling.

"Not only does it affect my family and me, but all the other freelance professional consultants who are trying to earn an honest living," he said. "I was never an employee of the AA and I simply cannot understand how the High Court has reached its decision."

PCG was formed specifically in reaction to the IR35 rules, which are named after the number code of the Inland Revenue press release that announced them and are now part of the Income Tax (Earnings and Pensions) Act.

PCG managing director John Brazier said that the ruling had potentially significant implications.

“This is a potentially massive blow to freelancers throughout the country," he said. "This case threatens the long-established defences against IR35; we will be looking at the judgment in very close detail to work out its full implications.”

Copyright © 2008, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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