IR35 Case Lost on Substitution Principle


IR35 dictates the circumstances in which services supplied by a ‘one man band’ company are to be treated as supplied by the person directly, rather than through the company. It allows HM Revenue and Customs to regard a person who trades through the medium of a company as the employee of the businesses which employ his company. It is therefore unpopular, particularly in the IT industry where the use of one man band companies is commonplace.

The practical effect of IR35 is to increase the tax burden of the company, mainly due to the imposition of National Insurance costs, which would otherwise not be chargeable.
In a recent case, an IT contractor lost his claim that IR35 did not apply to his company, which supplied services through a third party and an agency to the end user. The telling point appears to have been that the contractor who was to perform the work was named specifically and could not, without prior agreement, provide a substitute to do the work if he did not.
Partner Note
Dragonfly Consultancy Ltd. v HM Revenue & Customs [2008] EWHC 2113 (Ch). See
There is a very good and succinct summary of the case in the ICAEW’s Tax Faculty weekly newswire No 423 (16 September, 2008).

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