The ruling, by the Special Commissioners of Income Tax, does not set a legally binding precedent but it will have a significant influence on other such cases, said David Smith of tax consultants Accountax. Smith handled the case on behalf of the contractor, Mike Ansell from St Albans in Hertfordshire.
Ansell, an IT specialist working in the defence sector who has undertaken several projects for BAE Systems, said he was greatly relieved by the judgment. "It has taken nearly two years to have this matter resolved," he said in a statement, "and I am over the moon. I hope that this ruling will help thousands of other contractors in a similar situation."
Smith said there were five reasons why the judge came to the decision that Ansell was not, as the Revenue contended, disguised as a permanent employee and therefore liable to pay more tax.
"First, there was no obligation on the part of British Aerospace to give Mike work," said Smith. "And second, there was no obligation on the part of Mike to do a minimum or guaranteed number of hours, so there was no mutuality of obligation."
The third reason for the judgment, said Smith, was that Ansell had the flexibility to take time off when he wanted and didn't need to ask permission. "The judge highlighted this as an important distinction between a person in full employment and a contract worker," said Smith.
Ansell also had the ability to offer a substitute worker, said Smith, although in practice he never did. The judge also placed a lot of importance on the day-to-day differences between someone such as Ansell and a regular employee -- he didn't have access to a company pension, a company car, paid holiday, or grievance procedures.
"The other point which is helpful in this judgment," said Smith, "is that the Revenue's main argument is to say 'is the contractor acting as a person in business on his own account?'. This is one of the traditional legal tests." When judges laid down this test, said Smith, they outlined several criteria - including whether the individual has their own premises or carries financial risk - that would determine whether someone is acting as a business on their own account.
"The Revenue said Ansell didn't have these characteristics," said Smith. "But the judges said no, you can apply that test too rigidly. You need to look at the nature of the person's position on more subjective basis." Someone such as Mike Ansell, he said, who is doing highly classified security work in a secure BAE location, would not be expected to behave like an entrepreneur. "This is good because it knocks that Revenue argument on the head."
The Professional Contractors Group, which has campaigned vigorously against IR35, welcomed the result. Chairman Dr Simon Juden said, "This comprehensive and detailed judgment helps provide clarification regarding the tax status of freelance consultants, and we are pleased to see yet another ruling that is consistent with PCG's historical advice and our understanding of employment status."