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Contractor wins IR35 ruling

An IT specialist has won a landmark case against the Inland Revenue over the IR35 tax. The Special Commissioners of Income Tax gave five reasons why Mike Ansell should not be regarded as a disguised employee and therefore liable for more tax, according to a report by ZDNet News.03 Aug 2004

The IR35 legislation came into force in April 2000. It was introduced to remove what the Government saw as a loophole for contractors to trade as limited companies to avoid tax and National Insurance Contributions, in circumstances where the individual worker would otherwise be an employee of the client for whom they work.

Critics say that IR35 prevents businesses in the knowledge-based sector from operating on similar terms to their larger competitors.

According to reports, Mike Ansell had been self-employed for at least 20 years, contracting out his services as an IT specialist through his firm Ansell Computer Services Limited. Two of his contracts, with BAE, were deemed by the Inland Revenue to be in breach of IR35, meaning that Ansell was liable for more tax.

On appeal, however, the Special Commissioner ruled that this was not the case. Speaking to ZDNet News, Ansell's tax consultant, David Smith, from Accountax, explained that the ruling was based on five criteria:

BAE was not obliged to give Ansell work.

Ansell was not obliged to do a set number or minimum number of hours.

Ansell could take time off as and when required, without asking permission.

Ansell, in terms of the contract between his company and BAE, could offer a substitute worker – although he never did.

Ansell complied with the test of "is the contractor acting as a person in business on his own account", without being an obvious entrepreneur.

In a statement, Smith said: "This case is very important in that it highlights the significance of differences between freelancers and permanent employees. It also acknowledges that a contractor may be outside IR35 even though there are very few factors pointing to his being in business on his own account."

"It has taken nearly two years to have this matter resolved," added Ansell, "and I am over the moon."

The judgment is likely to be published in the next few weeks.