The development of the Intermediaries Regulations (IR35) and its impact on personal service companies has been a hot topic in recent years. We have previously written about the battle between actor Robert Glenister’s personal service company, Big Bad Wolff Limited, and HMRC (in which HMRC was successful).
The outcome of the Big Bad Wolff hearing was that HMRC could levy income tax and National Insurance contributions (NIC) on monies earned by contractors who have provided services through limited companies going back 10 years. However, in true fairy tale style, the big bad wolf was not the end of the story and over the last 18 months or so, HMRC have been unsuccessful with a number of IR35 cases. The most recent being the appeal by Lorraine Kelly’s (LK) personal service company – Albatel Ltd (Albatel) – which last week dealt HMRC a serious blow in the First Tier Tax Tribunal (FTT).
- In July 2012 Albatel entered a contract with ITV Breakfast Ltd (ITV) to provide the services of LK in connection with the television programmes “Daybreak” and “Lorraine” for a minimum term of 2 years and six months;
- Albatel was to be paid £1,000,000 for year one, £1,050,000 for year two and £1,102,500 for year three. Payment was to be made in monthly instalments;
- In July 2016 (varied in January 2017), HMRC issued determinations in respect of PAYE (Determinations) and decisions in respect of the NIC (Decisions) it said Albatel should pay in respect of the payments received for the provision of services by LK to ITV;
- Albatel appealed the Determinations and Decisions to the FTT on the Grounds that:
- The nature and range of LK’s work meant that she should be treated as a self-employed star;
- Consequently the IR35 legislation cannot be invoked so as to deem there to be any employment relationship; and
- Furthermore, that if the IR35 legislation is applied, that a deduction would therefore have been permissible for agent’s fees paid.
- The questions the FTT posed to itself were:
- Was Albatel to be treated as an intermediary employer? I.e. is the notional contract between ITV and LK a contract of service as contended by HMRC or a contract for services as Albatel contended; and
- Whether agency fees paid by Albatel to Roar Global Ltd for negotiating the agreement between Albatel and ITV were deductible as an expense of the employment.
- Having considered the case law in respect of whether or not the relationship between LK and ITV should be treated as a contract of service (i.e. a quasi-employment contract direct to ITV) or a contract for services (i.e. a procurement of services contract), the FTT concluded:
- Taking the full circumstances into account, whilst ITV was obliged to pay LK for the services provided, and there was an expectation of at least 42 weeks of work per year, there was no obligation on ITV to call on LK and the show could have been dropped at any point. Accordingly whilst there was a suggestion of mutuality of obligation, this only amounted to the “irreducible minimum” and was therefore not in itself determinative.
- That control of LK’s work lay with LK. In the FTT’s view, “the level of control [of ITV over LK] falls far substantially below the sufficient degree required to demonstrate a contract of service and we are satisfied that the factors strongly indicate that the contract was one for service”.
- There were no other provisions of the notional contract between LK and ITV that suggested a contract of service. LK was not entitled to sick pay, holiday pay, pension entitlement, maternity pay; she did not receive training from ITV nor was she subject to the same appraisals as other ITV employees.
- Overall, the hypothetical contract between LK and ITV was a contract for services pursuant to the contract between Albatel and ITV. The appeal was accordingly allowed and the Determinations and Decisions overturned.
- Irrespective of the above findings, the FTT went on to conclude that, if IR35 had applied, LK was a “theatrical artist” and therefore the agency expenses would have been properly deductible.
This is another blow to HMRC’s implementation of the IR35 legislation. The consequence of HMRC failing at the Tribunal on a number of occasions indicates a pattern whereby HMRC are failing to engage properly in the subtleties of the legislation and its interplay with employment law. and is yet to appreciate the importance or interpretation of the case law surrounding issues outside of the tax world (in this instance in respect of employment contracts)
It is also another example of HMRC’s reluctance to explore alternative dispute resolution and reach a sensible conclusion. The cost (both financially and in management time) to HMRC in pursuing these cases to a tribunal should not be underestimated. Whilst some will lambast HMRC for adopting an aggressive and unyielding approach, it should serve as wake up those using personal services companies, and employers, to the aggressive stance HMRC are adopting.
The judgment is a helpful steer to employed and self-employed alike as to what the FTT will focus on when considering the applicability of the IR35 legislation. Steps should be taken to ensure that the necessary protections are in place. If they are not, then the risk that HMRC will successfully pursue should not be ignored.
It is not yet known whether HMRC wishes to appeal the judgment. An HMRC spokesperson has said that “We will carefully consider the outcome of the tribunal before deciding whether to appeal” – given the carefully considered findings of the FTT this seems unlikely, but anything is possible at the moment. It should not be forgotten, that Albatel had filed all of its necessary tax returns and had paid all of the corporation and other taxes due on the monies it had received, so it is unclear how much success any appeal will have.
HMRC’s approach is a continuation of its continued aggressive approach to legitimate or seemingly legitimate tax planning. It has previously stated it has a list of over 400 media figures it wants to pursue in respect of historic and current personal services companies.
Whether HMRC will take a more considered line in future remains to be seen. It should be noted that HRMC’s internal policy is only to pursue cases to tribunal where it considers it has an 80% prospect of succeeding. It follows therefore, that HMRC’s decision to pursue Albatel and LK was already a carefully considered approach.
With further IR35 legislative changes coming down the pipeline to Parliament at the moment in relation to private companies, we consider it likely that HMRC will continue with its aggressive approach to clamping down on this type of tax planning.
What can you do?
We represent a growing number of clients who were providing services in this way and are currently negotiating settlements with HMRC and pursuing FTT appeals where appropriate. If this article has given you cause for concern, or if you have received enquiries, decisions or determinations from HMRC in respect of the use of a personal services company, then get in touch with us.