key in sand

IR35: HMRC suffers another high-profile defeat

Caroline Harwood, Partner, Head of Share Plans and Reward
key in sand

When HMRC won its tribunal case against Christa Ackroyd Media Ltd a little over a year ago, they said that this was likely to be the first of up to 100 similar actions to be taken against TV presenters in relation to IR35 and their personal service companies (PSC).

However, since then HMRC has lost five of the six cases taken on IR35 issues.  Perhaps the most notable are Albatel Limited v HMRC (the ‘Lorraine Kelly case’) and very recently Atholl House Productions Limited v HMRC, in which HMRC sought to apply IR35 in respect of Kaye Adams’ role with the BBC.

A number of commentators therefore suggest that HMRC might have difficulty applying IR35 effectively following the rules from April 2021 and professional bodies such as ICAEW and others have previously expressed concern that reform of IR35 in the private sector from April 2020 is premature.

What is IR35?

IR35 is anti-avoidance legislation designed to deal with circumstances where services ordinarily provided by an employee are instead structured through an intermediary – typically a personal service company (PSC) – to avoid tax.    

Currently, if IR35 applies, where a PSC is providing services to a private sector business, it must apply PAYE and NIC to payments for services. From April 2021, this responsibility moves to the engager (applicable in the public sector since April 2017). HMRC issued a consultation document to frame the new legislation to put this reform into place. In this, HMRC state that non-compliance with in the private sector is growing and will reach £1.3 billion each year by 2023/24. However, the recent IR35 case losses might lead one to question whether this is an overestimate.

The cases for the tribunal to answer

In each case the question which the tribunal needed to answer was whether as a result of ”the services…provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client” (ITEPA 2003 s 49(1)(c)(i)).

Also it was necessary to consider the terms of the ‘hypothetic contract’ (Usetech Ltd v Young [2004] EWNC 2248) between the worker (in each case the TV Presenter) and the client (the BBC or ITV). In each case the tribunal considered the terms of the written contracts between the presenters’ respective PSCs and the television companies engaging them. The tribunal also considered the way the agreements were actually performed in practice in order to ‘paint a picture’ (Lord Nolan in Hall v Lorimer [1993] 66 TC 349) of each engagement. This enabled the tribunals to determine whether there were sufficient pointers to employment and for IR35 to apply.

The judgements and how they compare

In the Ackroyd case Judge Cannan referred to Ready Mix Concrete (South East) Limited v Minister for Pensions and National Insurance [1968] 2 QB 497 and Carmichael v National Power plc [1999] 1 WLR 2042 and highlighted that presence of ‘mutuality of obligation’ and ‘control’ were the ‘irreducible minimum necessary to create a contract of service’. In the Adams case Judge Beare highlighted the importance of not being limited to these two factors but also considering the other terms of the arrangement to determine whether the overall picture was one of employment.

Control and first call over time

The degree of control over the worker was considered in each case. Importance was attached to whether the presenter had to obtain agreement from the engager to perform other work. Neither Adams nor Kelly actually did so (though per the written agreement Adams should have done), but Ackroyd was required to and actually did ask permission from the BBC before performing other engagements. As such, the BBC had first call over her time but the tribunals found that this was not the case for Adams nor Kelly. Each presenter had editorial control over the content of their programmes and autonomy over live broadcast content and none undertook training or other obligations as expected for employees.

Mutality of obligation

Each received a minimum annual fee, but the engager could terminate the programmes at any time.

Other factors

Judge Beare set out the importance of considering the worker’s career as a whole to determine whether they were self-employed or an employee on a fixed term contract. The Judge helpfully identified key differences between Adams and Ackroyd in his judgement. These were:

  • Ackroyd’s service contracts were for seven and five years, Adams’s were for around one year and Kelly’s were around two years
  • Ackroyd’s income from the contracts amounted to 98% and 96.5% of her income while Adams’ are reported to be 30% to 50% and Kelly’s were 33% and 69%
  • Ackroyd had a clothing allowance, Adams did not
  • The BBC had first call on Ackroyd’s time but this was not the case for Adams and Kelly

Impact and the future for IR35

These cases illustrate the importance of judging each case on its particular facts and painting a picture of the working pattern as a whole and the particular engagement.

Going forwards, HMRC is encouraging engagers to rely on their Check Employment Status for Tax tool (CEST) but this lacks the key ability to make such judgement calls. Therefore, seeking specialist tax advice is key and engagers should not shy away from challenging CEST results where they believe they are genuinely entering a contract for services with a self-employed worker.

This article first appeared in Accountancy Daily in May 2019.

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Caroline Harwood
Caroline Harwood
Partner, Head of Share Plans and Employment Tax