IR35 continues to be a topic of discussion for many self-employed individuals, especially with the new changes set to be implemented in April 2020. Many contractors worry about this issue, which can be complex to understand and follow, so we understand if this legislation is also playing on your mind.
We offer expert IR35 advice at Gorilla Accounting, which will help you to determine whether you’re within IR35. By providing accounting for contractors, we can also help you to remain compliant with the latest HMRC rules and legislation.
Many people may not consider that HMRC can be defeated when it comes to their IR35 pursuits; however, this couldn’t be further from the truth, as HMRC has both won and lost several cases, including high profile ones.
More High Profile HMRC Losses
If you believe HMRC ruled you to be within the scope of IR35 wrongly, you can appeal this decision and take it to the First-Tier Tribunal. This was the case with several public figures who determined HMRC made a mistake and challenged the deemed tax bill they would have had to pay otherwise.
Some of the most recent cases that have ensured IR35 stays in the news are the following:
One great example of this is Paul Hawksbee, radio presenter and writer, who challenged HMRC and won the tribunal case.
HMRC argued that the engagement between Hawksbee’s limited company Kickabout Productions Limited and broadcaster Talksport, which spanned 2012-2015 and saw Hawksbee working as a co-presenter for a few years, meant he was Talksport’s employee. In their arguments, HMRC said this engagement showcased a significant degree of stability and the presenter’s continued on-air presence made him part of the Talksport organisation.
The tribunal reached a decision in favour of Hawksbee, as it was determined, amongst other factors, that the presenter was not subject to appraisals or disciplinary processes, so he couldn’t be part and parcel of Talksport.
In addition, HMRC argued that, during those three years, Talksport’s contracts made up 90% of Hawksbee’s total income, which displayed economic dependency – however, the tribunal declared that this also showcases a high degree of financial risk, as Hawksbee had to turn down other job offers which clashed with his presenting work.
The Judge presiding over the case, Thomas Scott, concluded that Hawksbee had a great degree of autonomy, as well as editorial and artistic control, which worked in his favour.
If Hawksbee hadn’t appealed the taxman’s decision – or if he had lost the case – he would have had to pay a £140,000 tax bill.
Former Loose Women presenter, Kaye Adams, also successfully challenged HMRC in a tribunal, which determined that a job she did for the BBC qualified as ‘off-payroll’ for tax purposes. While the tax authority believed Adams was not freelance and IR35 applied in her situation, she was able to appeal the decision in the First-Tier Tribunal, which ruled in favour of her company, Atholl House Productions.
This meant Adams was able to avoid a PAYE tax bill of around £81,000 and a further £43,000 in national insurance contributions, which HRMC believed were due after the presenter’s engagements with the BBC between March 2015 and March 2017. During this period of time, she presented a show on BBC Radio Scotland titled ‘The Kaye Adams Programme’.
Adams works for the BBC but also for other media organisations, from TV to radio, and writes columns for print media as well. However, in spite of this, she found herself contesting HMRC’s decision in a tribunal, which considered specific factors in order to determine whether she was considered an employee. For instance, the tribunal considered whether the contract involved mutuality of obligation, if the BBC had a great degree of control over her and whether other provisions were consistent with typical employment contracts.
Among other arguments, HMRC said that Adams had no real right of substitution and that the BBC had editorial control over the programme – she was able to counteract by proving that she decided which callers to take while on air, the direction the show should take and that the BBC never controlled or restricted work she did for other people.
One of the determining factors for the tribunal was that Adams wasn’t entitled to a pension, didn’t receive holiday or sick pay, and didn’t get maternity leave. A typical employment contract includes, at least, some of these benefits.
After losing an IR35 case against TV presenter Lorraine Kelly earlier in the year, who successfully fought back against a tax bill of £1.2 million, this defeat was another setback for HMRC. The tax authority said they were disappointed in the tribunal for its decision that the intermediary rule didn’t apply to Adams, but many believe this only serves to showcase that HMRC cannot understand they own rules.
Fospero has become the latest presenter to win an IR35 case against HMRC. The case revolved around whether the ITV presenter would be considered an employee if she was under a contract directly with the TV company. However, she was found to be outside IR35 and managed to win her appeal against an £80,000 back-tax payment.
HMRC argued that Fospero was liable to pay the additional income tax and national insurance contributions for the 2012-13 and 2013-14 tax years due to her engagements between ITV and her own limited company, Canal Street Productions.
The presiding judge, Tribunal Judge Ashley Greenbank, said that “in the period in questions, Ms Fospero was engaged, through Canal Street, in a separate business. She worked under a series of short-term engagements for ITV and had no guarantee of further work outside those engagements and ITV had no obligation to provide any work. All of these factors point towards Ms Fospero being regarded as self-employed.”
Helen Fospero’s case is similar to that of Kaye Adams, as both proved to be in business on their own account. However, because Fospero didn’t receive the majority of her income from providing services to other clients and relied on her agents to secure additional work, HMRC has said they want to appeal the judgement.
Other IR35 Losses
These cases are more widely known due to their high profile, but HMRC has, in the past, lost a considerable number of other appeals.
For example, Mr Daniels set up a limited company in 2004, called MDCM Ltd, which provided construction management services to several construction companies. After an HMRC investigation, the government determined that a contract between Daniels’ company and one of its clients was within IR35.
Some of the arguments included the fact that he couldn’t provide a substitute to carry out his work and that he didn’t take any financial risks apart from paying for his own travel and expenses. Daniels was considered an employee by HMRC, who believed he should pay taxes as one.
Daniels appealed the ruling in the First-Tier Tribunal, who concluded that the flat rate per day, the lack of notice period and the lack of employee benefits meant that he wasn’t an employee. Therefore, HMRC’s decision was overruled.
In addition, business analyst Ian Wells, who worked for the Department of Work and Pensions via his own limited company, Jensal Software Limited, and through a recruitment agency, for 11 months, was considered to be within IR35 by HMRC. After being told to pay all income tax and national insurance contributions incurred during the time period of the contract, which totalled £26,000, Wells chose to appeal.
Wells had control over tasks and deadlines, had no notice period and was capable of terminating his contract to pursue other opportunities. These and other factors were taken into consideration by the tribunal, who sided with Wells and overturned HMRC’s decision.
HMRC and BBC Presenters
However, not everything is good news. HMRC have recently won some cases against BBC presenters, which raises a few questions and concerns over other presenters.
David Eaves, Tim Wilcox and Joanna Gosling have been found to be within IR35 and now have to pay £920,000 in unpaid taxes. While these presenters were believed to have been forced into contracting through personal service companies (PSCs) by the BBC, the tribunal Judges decided that they were told how, where and when to work, so the relationships were ones of employment.
The BBC has taken responsibility for the contracts and will help resolve the cases; they will have to settle approximately £200,000 in employers’ national insurance, for instance.
However, because the outcome was a split decision solved on a casting vote, this could have implications for other presenters who work for PSCs and may now have to pay thousands of pounds in owed taxes.
The three presenters endured eight years of HMRC investigations and are upset that they were forced into setting up PSCs by the BBC and never made aware of IR35 concerns. The complexity and uncertainty surrounding this legislation make it all the more stressful, since HMRC don’t provide clear-cut rules.
Still, despite these HMRC wins, the government has also lost cases against BBC presenters in the past, as seen by Kaye Adams’ case. This means that, while there may be issues for some presenters, it’s not one hundred per cent certain they will lose their appeals. On the contrary, the unclear subject has allowed Judges to determine in favour of the contractors.
What Are the Tests of Employment?
While it can be difficult to get some clarity on this issue, both HMRC and the tribunal Judges consider certain factors when making deliberations, which are seen as the ‘tests of employment’:
- Control – the degree of control can determine someone’s IR35 status; does the client control the way the services are provided? If so, to what degree? If the contractor retains little to no control over the services provided, they’re more likely to be considered an employee.
- Mutuality of Obligations – this is one of the most important determining factors and continues to feature heavily in every decision and appeal. It can be summarised in one question: is the client obliged to offer work and is the individual required to accept it?
- Substitution – can the contractor perform a service personally, or is he or she able to send a substitute in their place? If you can’t be replaced, then you will be seen as providing a personal service and, therefore, are likely to be considered an employee.
While these are the main points when deliberating whether a worker is inside or outside IR35, there are many other elements that can factor in. For example, if a client provides the equipment needed to perform a service and you don’t use your own, then HMRC can argue that you’re a disguised employee.
Self-employed individuals are typically paid according to projects they complete, so this will help to show that you’re not an employee; additionally, contractors tend to work for several clients at once, as there’s no exclusivity in self-employment.
Intention matters when it comes to determining IR35 status as well. This means that HMRC will consider the relationship between a contractor and a client one of employer/employee even if the contractor stipulates otherwise.
The Issue with CEST Tool
One of the main elements that contribute to this lack of transparency is HMRC’s CEST tool. Created as an assessment tool to check the tax status of contractors, CEST appears to be unable to sufficiently demonstrate whether a contract of service falls inside or outside IR35. Those who criticise CEST say it’s highly inaccurate and contractors claim they find the tool to return flawed assessments on a consistent basis.
From 6 April 2020, medium and large-sized companies in the private sector will have the responsibility of determining whether contractors fall within IR35 or not, but it’s still crucial that self-employed individuals are aware of their status.
According to HMRC, the CEST tool is capable of reaching a conclusion in 85% of cases, with 15% needing additional evaluation – before changes are made to IR35 next year, HMRC hopes to reduce this inconclusive figure.
Due to the flawed nature of the CEST tool, it’s best that contractors seek professional advice in order to ensure they’re not at risk of being found inside the scope of IR35.
While HMRC have won some IR35 cases, it’s also noteworthy they have lost a few as well. This has made individuals wonder whether HMRC understand their own rules and if their assessment tools are adequate. All of this also means that businesses may face similar issues from April 2020, when the new IR35 changes will come into effect.
As contractor accountants, we understand the worry many contractors experience in regard to IR35, so we aim to help with our specialist advice.
Get in touch today or, alternatively, check out our contractor tax calculator to figure out your take-home pay.