2020-02-17
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Complying with IR35: don’t be lulled into a false sense of security

Home / Knowledge base / Complying with IR35: don’t be lulled into a false sense of security

Posted by Israr Manawer on 02 May 2019

Israr Manawer - Tax and HMRC Disputes Lawyer
Israr Manawer Tax Consultant

Mixed results in IR35 tribunal hearings for HMRC with a win against Hustle star Robert Glenister but losing against Loose Women presenter Kaye Adams.

The provision of an individual’s services through an intermediary (usually a personal service company (PSC) to an organisation can have significant tax advantages for both parties. However, HMRC’s belief that such intermediaries were specifically being used as tax avoidance vehicles led to the implementation of the off pay-roll working rules (otherwise known as IR35) in 2000, designed to address ‘disguised’ employees.

In 2017, the IR35 rules were amended, placing the onus on employers in the public sector (such as the BBC) to be responsible for determining the employment status of those individuals whose services they contracted to use via PSCs. For those individuals deemed to have employee, rather than self-employed, status, organisations must pay the requisite income tax and NIC as appropriate. This amendment is now to be extended to large and medium-sized, private sector businesses from April 2020. Given the aggressive manner in which HMRC is pursuing a number of high profile media personalities (among others) whom they accuse of trying to circumvent the rules, private sector businesses are understandably concerned about the additional compliance obligations - and the potential fallout from getting it wrong.

Speed read

  • HMRC was successful earlier this month when the tribunal rejected Big Bad Wolff’s appeal and applied a purposive approach to a PSC through which the actor, Robert Glenister, provided his services to the BBC.

    The court held that:
    • had Mr Glenister provided his services directly to the BBC, his status would have been that of an employee and thus subject to NIC.
    • the PSC had been established with the objective of avoiding NIC and thus fell foul of IR35.

  • However, HMRC’s overall record to date is poor, having failed to prove that several television presenters were supplying their services to broadcasters as employees, rather than as self-employed contractors. Its most recent failures include cases against Lorraine Kelly and Kaye Adams.
  • HMRC originally pursued Lorraine Kelly for unpaid tax for a two year period on the basis that, to all intents and purposes, she was an employee of ITV. Ms Kelly’s legal team proved the contrary, arguing among other things that:
  • She exercised significant control over the content of the two programmes she presented, ‘Daybreak’ and ‘Lorraine’;
  • ITV was not obliged to call on Ms Kelly during the period for which she was paid for her services and the show could have been abandoned at any point;
  • She did not receive any benefits usually associated with a contract of employment such as sick pay, holiday pay, pension entitlements or maternity benefits.
  • In a case determined earlier this month, another member of the Loose Women cast, Kaye Adams, who provided her services to the BBC via a PSC, won her case against HMRC after her legal team proved that:
  • Ms Adams had editorial control over the content of the programmes she presented;
  • She earned at least 30% of her income from sources other than the BBC;
  • The BBC did not have first call on her services (she was able to present in locations other than the studio to enable her to carry out non BBC-related engagements).

Commentary

The judge considering Ms Adams’s case was at pains to point out that HMRC had placed too much emphasis on the written contract between Ms Adams and the BBC. For instance, the contract had specified, among other things, that the BBC would retain editorial control. In practice it had never sought to exercise this right and this, the judge determined, was the nub of the matter: what actually occurs in practice is more important than what is written in a contract. By looking at the relationship in the round, it is easier to establish whether or not there is a deliberate attempt to avoid tax as was proved in the Glenister case.

The cases of Ms Kelly and Ms Adams highlight the opacity of the IR35 rules and HMRC difficulties in interpreting them correctly. Various commentators have suggested that HMRC has an insufficient understanding of the nuances of employment law which leads it to isolate specific clauses of a contract rather than reviewing the nature of the overall relationship between a contractor and the client. Nonetheless, regardless of any inherent weakness in HMRC’s current approach, it should be assumed that it will try to get its house in order before the IR35 amendments are rolled out to the private sector.

Wider impact

Those people currently providing their services via a PSC should review the terms of their engagement thoroughly.  It would be easy for both individuals and affected companies to be lulled into a false sense of security due to HMRC’s past failures. HMRC shows no sign of softening its aggressive stance towards those it suspects of tax avoidance and, one assumes, it will be learning from past experience to improve its future success rate in court.

What can you do?

If you think that you might be caught by the rules, it is important to address your concerns sooner rather than later. We represent a number of clients who have been affected by this legislation and have helped clients to negotiate a settlement with HMRC following enquiries. In addition to helping clients with HMRC determinations and enquiries, we have also been successful in obtaining compensation from parties’ professional advisers.  Typically clients have conducted their tax affairs in this way following advice from their accountant, financial adviser, tax adviser or even their solicitor.  These professional advisers owed a duty of care to provide honest and appropriate advice on the risks associated with tax avoidance.  In such circumstances you may have a claim for professional negligence.

For more information on the changes to the IR35 rules and how such changes will affect businesses, please see our article “IR35 – What do you need to know?”

About the author

Israr Manawer

Tax Consultant

Israr is a tax consultant within the commercial litigation team, he previously worked for HMRC.

Israr Manawer

Israr is a tax consultant within the commercial litigation team, he previously worked for HMRC.

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