In recent months, we have seen two high-profile cases involving household TV names, both of which refer to IR35.
Over 20 years ago, on 9 March 1999, the then Inland Revenue issued a press release (“IR35”) which outlined the Government’s plans to clamp down on the growing use of one-man-band limited companies to provide professional services to clients, where the individual was still working in a manner akin to a traditional ‘employee’, while enjoying the tax benefits afforded them by a corporate structure.
More commonly, IR35 has become shorthand for a set of rules found in Chapter 8 Part 2 ITEPA 2003, "Application of provisions to workers under arrangements made by intermediaries".
1. IR35 is designed to bring income that would not otherwise be treated as employment earnings into charge for PAYE and NICs.
2. IR35 applies where an individual personally performs services for a client under an arrangement involving an intermediary, (e.g. a personal service company, although this also applies to partnership income), and either of two following circumstances apply:
- the service is provided under a contract made directly between the individual and the client, and, after considering the employment status indicators (see article Determining Employment Status), the individual would have been treated as its employee, or
- the individual acts as an office holder (e.g. director) for the client. This covers all Non-Executive Directors as well as anyone heading up a public sector organisation.
3. IR35 does not apply if the worker is engaged directly by the end client; however, where an intermediary is involved, the IR35 or “off-payroll working rules” as they are otherwise referred to, ensures that either the contractor or the end-client has the responsibility for determining employment status and deducting PAYE under Real Time Information (“RTI”).
Who is affected?
Previously, the burden has been upon the contractor to pay the correct amount of tax to HMRC depending on their employment status. Since 6 April 2017, however, this burden has shifted in the public sector. Now any public sector body (be it a governmental department, school, or the NHS) has the responsibility for determining employment status and deducting PAYE under RTI.
In the autumn 2018 Budget, HMRC announced that it is extending off-payroll working in the public sector to the private sector. This introduction of IR35 to the private sector, which is currently set to be implemented in April 2020, will only apply to engagements by medium or large-end clients.
What is a medium sized company?
Whilst the Government has not yet defined what a medium-sized business is for this purpose, the current definition under EU law states that a medium-sized business has at least 50, but fewer than 250 employees, and either a turnover of up to €50 million or a balance sheet total of up to €43 million. This definition is similar to that set out in the Companies Act 2006.
In the 20 years since its introduction, numerous cases have been brought before the courts in respect of IR35 between HMRC and tax payers. Just in the last two months there have been two high-profile IR35 wins against HMRC as detailed below, however the rulings do not always go against the UK taxman (as detailed in the Christa Ackroyd case).
- Christa Ackroyd: HMRC had success with a high-profile win in 2018, involving the ex BBC North TV Presenter Christa Ackroyd. In the Christa Ackroyd case, one of the deciding factors as to her employment status was a contractual clause. This clause stipulated that the BBC had “first call” on her services, thereby giving them broad exclusivity over her services. The contact gave the BBC considerable control over Ms Ackroyd. She was unable to provide services to any other organisation without the BBC’s consent, there was no right of substitution and she was required to work 225 days a year for the BBC.
- Lorraine Kelly: More recently, in March 2019, HMRC lost its case against TV presenter Lorraine Kelly. The Lorraine Kelly case differs from the Christa Ackroyd case, in so far as HMRC were unable to establish that the TV Company exercised control over Ms Kelly as if she were an employee. It was ruled that Ms Kelly’s relationship with the TV Company was one that reflected the provision of services under a contract for services (a contractor) rather than being a contract of service (an employment contract). To coin a phrase, no master or servant relationship existed.
- Kaye Adams: In a case involving TV’s Loose Woman Kaye Adams, HMRC brought tax charges for PAYE and NIC from her personal service company for the period during which she had presented the BBC’s “The Kaye Adams Show”. In the ruling made by the First Tier tribunal only this last month, the judge considered that Ms Adams had roles outside the BBC and was therefore ruled as a freelance contractor, and did not have employee rights at the BBC (and so should not be treated as such for tax purposes).
Whilst the recent Lorraine Kelly and Kaye Adams cases undoubtedly will have come as a blow to HMRC, the three cases above all go to prove that reliance on the written contract is not sufficient to prove self-employment status or otherwise. Instead, evidence beyond the contract is required in order to consider the full facts of the case.
Where does this leave the engager/end-client, as HMRC guidance is lacking in clarity, as is its suggested CEST (Check Employment Status for Tax). The CEST has been criticised, as it does not cover all situations. (see article Determining Employment Status for further details on CEST).
If HMRC has difficulty in correctly determining employment status, we must consider that careful examination of all the relevant facts is necessary.
All of this goes to confirm that IR35 continues to place a compliance burden on businesses. A burden which is only set to increase from April 2020 when the rules in place with public sector bodies will be extended to medium and large business. So, from April 2020, affected businesses will be required to determine the IR35 status of all contractors who use limited companies, much like Ms Adams and Ms Kelly.
We hope that as further guidance emerges from case law and Upper Tribunal decisions, a shining light will appear to guide us through what has become a complex area.