Recent tax cases involving IR35

The changes to IR35 and the public sector recently have proved to be problematic for many contractors. The proposals to extend these changes to the private sector have also caused trepidation for those contracting through their personal service companies (PSC). The results of two recent tax cases involving IR35 have therefore sparked considerable interest amongst contractors.  

Recent tax cases involving IR35

IR35 - a brief recap

We've discussed the IR35 rules in a previous post though it's worth re-iterating. This is because you may be reading our blog as a first-time contractor. 

IR35 applies when HM Revenue determine that the relationship between an individual and their end client are such that, if they were engaged directly rather than via their personal service company (PSC), they would be treated as an employee. 

If IR35 applies then the PSC must operate PAYE on any amounts received. This is because it is effectively treated as income of the individual, not the company.

Christa Ackroyd Media Limited v HMRC

Christa Ackroyd (who presented BBC1's 'Look North') was engaged directly by the BBC via her PSC Christa Ackroyd Media Limited (CAM). The BBC required her to operate through a limited company. It's worth mentioning that this arrangement was set up before the recent changes to IR35 and the public sector.  

HM Revenue contested that had Ackroyd been engaged directly by the BBC on the same contract terms  (rather than via her PSC) she would have been regarded as an employee.

HMRC apply a number of tests to determine whether an individual has employee tax status. The tax tribunal in this case focused on the tests for mutuality of obligation and control.

If both conditions were met then this would have been highly indicative of employment status. Unless of course there were other contract provisions which were inconsistent with that of being an employee. 

What were the deciding factors?

Ms Ackroyd lost her appeal against the application of IR35 by HMRC. The following were considered decisive factors in arriving at this result.

  • The BBC was required to pay fees and Ackroyd was required to work for the BBC for 225 days per annum. This was sufficient to meet the mutuality of obligation test.
  • The BBC exercised a high degree of control over Ms Ackroyd. For example they had first call on her time, she attended BBC training sessions and could be told by the BBC who to interview. She also had to obtain the BBC's permission before accepting other non-BBC engagements 
  • The fact that CAM's contract with the BBC was for 7 years was significant and pointed towards employment
  • Ms Ackroyd used her own equipment to a limited extent. This was consistent with being an employee
  • Ms Ackroyd's case was not helped by the fact that there were inconsistencies in both oral and written statements. Ms Ackroyd also failed to call fellow BBC employees to the tribunal as witnesses .They may have been able to support her contentions.  

Other points

The tribunal also considered Ms Ackroyd's expense claims as a director of CAM for Sky TV subscriptions and use of home.

 The Sky TV subscriptions were disallowed because it was considered that these were not incurred exclusively in the performance of Ms Ackroyd's duties. 

 Use of home was disallowed because no evidence of any conscious agreement between CAM and Ms Ackroyd for her home working arrangements was produced. Furthermore no evidence was provided for the additional costs incurred by Ms Ackroyd for home working. 

Consequently the tribunal decided that both expenses claims should have been subject to PAYE deductions.

Albatel Limited v HMRC

HMRC argued that ITV’s contract with Albatel Limited (Lorraine Kelly’s company) was caught by the IR35 provisions. They also challenged the tax deduction for agent’s fees that was made against her earnings.

What were the deciding factors?

Ms Kelly was allowed creative input on her was involved of the show including changing the script and running order. 

There were also some fundamental difference between this and the Ackroyd case. These were as follows:

  • The contract was for a much shorter period – 2.5 years as opposed to 7 years.
  • Ms Kelly decided her own hours and undertook her research outside of contractual hours.  
  • She worked for other broadcasters and had her own clothing line. This contrasted with Ms Ackroyd whose earnings outside of the BBC were modest.
  • She was entitled to send a substitute if she was unavailable. It should be mentioned that an effective substitution clause can be helpful in defending an IR35 challenge by HMRC.

Whilst it was accepted that there was a mutuality of obligation (see above) it amounted to the bare minimum. Ultimately the control of the work lay with Ms Kelly not ITV. The level of control that ITV exercised was insufficient to demonstrate an employee/employer relationship between Ms Kelly and ITV.

Furthermore it was determined that ITV were effectively purchasing the 'Lorraine Kelly brand' rather than taking her on as an employee

It was therefore determined that the IR35 legislation did not apply in these circumstances.

On the matter of the agents fees, the tribunal came to the conclusion that Ms Kelly was performing a 'theatrical role' when live on air. This meant that the deduction for agent's fees were allowed on the same basis as the Richard and Judy tax case previously.  

We would stress that the cases discussed above don't set a legal precedent. However, they do provide a helpful insight ahead of the proposed changes to IR35 and the private sector.

For more useful information, check out our Ebooks here.

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