IR35 – Tax tribunal decisions on self-employed contractors
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The Government is currently proposing to extend the public sector IR35 off-payroll working provisions to the private sector with effect from 6 April 2020. This will affect all medium to large sized businesses who engage contractors through personal services companies ("PSCs") or other intermediaries.
The provisions effectively shift liability for determining the nature of the engagement from the individual's PSC to the end-user client and the responsibility for deducting tax and NICS from the PSC to the 'fee payer' (that is, the entity in the chain responsible for paying the fees of the PSC), in circumstances where the relationship between the end-user and the individual consultant is one of 'deemed employment'.
Unfortunately, there is no clear statutory test to determine employment status for tax purposes and each engagement will need to be assessed on its own facts taking into account the key factors established and developed by case law, namely:
On this page, we have gathered together recent decisions of the tax tribunals regarding IR35 and provided some analysis of the trends we've identified in those cases. If you would like more information about any of these decisions, please get in touch.
In this case, an IT consultant successfully appealed HMRC's determination that his multiple engagements with both Accenture and DWP over a five year period amounted to 'deemed employment'.
In this claim, Kickabout Productions Ltd also successfully challenged HMRC's determination that the engagement of Paul Hawksbee by Talksport via his PSC amounted to deemed employment.
In contrast to the above two cases, in this case the Upper Tribunal determined that the BBC presenter, Christa Ackroyd, was an employee and was therefore liable to account for income tax and NICs of over £400,000.
In this combined case, the First-tier Tax Tribunal deemed that the engagements of three news presenters by the BBC each amounted to deemed employment and were therefore caught within the IR35 provisions.
In contrast to the cases of both Ackroyd and Paya, in this case, the Tribunal considered the engagement of Kay Adams by the BBC to fall outside of IR35 and Ms Adams to be genuinely self-employed.
The cases above highlight the fact-sensitive nature of IR35 assessments and the importance of the contractual agreement reflecting the true reality of the working relationship.
Since the announcement of the proposed changes, Barclays Bankhas announced that it will no longer engage contractors through limited companies, instead choosing to move all of its contractors onto the 'Pay As You Earn' system. Others have since followed suit.
Such blanket decisions may not be right for all businesses though, as they don't take into account the fact-specific application of IR35 and risk narrowing the pool of independent contractors available to businesses that really do want or rely on a flexible self-employed workforce.
In the run-up to the general election, the Chancellor of the Exchequer, Sajid Javid, vowed to review IR35. He said that the Conservative party were "on the side of self-employed people", raising the prospect of the proposed April changes being delayed, altered or removed.
However, the proposals have since been confirmed as going ahead and the consultation on the draft legislation recently closed on 19 February 2020, such that the final form legislation is anticipated.
Businesses should therefore continue to prepare for the implementation of the provisions and take steps to reduce their exposure to risk, including auditing current contractual relationships and reviewing and updating template agreements.
Any engagements that look and feel like one of employment should be renegotiated or moved onto appropriate contracts and taxed accordingly from 6 April 2020. Be aware though that making blanket decisions is likely to prove unpopular with contractors and could impact on your ability to deliver contracts/services in the event that commercial terms cannot be agreed with key individuals.
Likewise, disgruntled consultants who are suddenly deemed to be employees for tax purposes may look to exploit such a decision to bring a claim for historic employment-related benefits (such as holiday pay).
When reviewing and updating any contracts it is important to bear in mind that the IR35 legislative changes coincide with changes to the section 1 statements that must be given by employers under the Employment Rights Act 1996. Where applicable therefore, any revised template documents should incorporate the required statutory particulars.
HMRC has revamped its online Check Employment Status for Tax tool (CEST) following input from more than 300 stakeholders, however, the tool remains the subject of criticism for its over-reliance on the right of substitution and failing to test for mutuality of obligation. We therefore suggest that its use should form part of your overall assessment, but should not be the sole assessment that you rely on.
Should you have any questions in relation to these issues or would be interested in assistance with reviewing your arrangements and preparing for the upcoming changes, please get in contact with Nathalie Ingles or Charlie Maples.
