IR35 Tribunal victory for HMRC

29 Mar, 2018

Christa Ackroyd will be familiar to many as the face of BBC’s news programme ‘Look North’ from 2001 to 2013, and it is in respect of that role that HMRC have sought to recover tax and national insurance contributions (NIC) of £419,151 under the ‘intermediaries legislation’ contained in Income Tax Earnings and Pensions Act 2003 (ITEPA) sections 48 – 61 and equivalent provisions in the Social Security Contributions (Intermediaries) Regulations 2000. This legislation is commonly known as IR35.

IR35 and the current climate

In recent years we have seen an increasing focus on perceived tax avoidance through off-payroll working. The Finance Act 2017 and the Social Security (Miscellaneous Amendments) Regulations 2017 (SI 2007/373) introduced new rules which meant that where a public authority (as defined by the Freedom of Information Act 2001 Schedule 1) engages a worker via an intermediary, the engager must determine whether IR35 applies and account for the relevant PAYE and NIC liability rather than it being the responsibility of the intermediary itself.

On 7 February 2018 the government published its response to the Taylor Review of modern working practices (July 2017). While this largely deals with employment law rather than employment tax issues, the response sets out a number of recommendations which should be understood by tax practitioners, in particular the call for clarification of employment status with an emphasis on control rather than personal service.

In the first IR35 victory for several years, the First Tier Tribunal ruled in HMRC’s favour, their decision providing tax practitioners with insight into the factors which must be considered when advising clients on the impact of IR35 and the decision reflects the emphasis on control considered in the government response to the Taylor Review.

Background to the Christa Ackroyd Media case

Ms Ackroyd was approached in 2001 by the BBC to become the anchor of ‘Look North’ in light of the success of its rival programme ‘Calendar’ which she presented at that time. Ms Ackroyd moved to Look North and following a variety of changes to the programme’s style and production, recommended by Ms Ackroyd, its viewing figures rapidly improved, such that they overtook those of Calendar.

At the BBC’s request Ms Ackroyd provided her services through her already established personal services company Christa Ackroyd Media Limited (CAM). HMRC contended that CAM should have accounted for PAYE and NIC on deemed employment payments made to Ms Ackroyd and Ms Ackroyd’s company appealed to the First Tier Tribunal on the basis that IR35 should not apply due to the ‘unique’ nature of her role.

The case to answer

IR35 is anti-avoidance legislation. Robert Walker LJ identified its purpose in R (Professional Contractors Group & Others) v IRC [2001] EWCS Civ 1945 as being

“To ensure that individuals who ought to pay tax and NICs as employees cannot, by the assumption of a corporate structure, reduce and defer the liabilities imposed on employee by the UK’s system of personal taxation.”

In other words, it is designed to deal with circumstances where services which might ordinarily be provided by an employee, are instead structured through an intermediary, normally a personal services company, with a view to avoiding tax.

So the question that the Tribunal needed to answer, and one which practitioners must consider for their clients, was whether as a result of “the services … provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client” (ITEPA 2003 section 49(1)(c)(i)).

In order to do this it is necessary to consider the terms of the ‘hypothetical contract’ (Usetech Ltd v Young [2004] EWNC 2248) between worker and client, in this case Ms Ackroyd and the BBC.

In doing so, the Tribunal considered both the terms of the actual contract and the facts of the case to establish whether there were sufficient pointers to employment for IR35 to apply.

HMRC guidance in its Employment Status Manual (ESM0515) quotes Market Investigations Ltd v Minister of Social Security [1969] 2QB173 explaining that a variety of factors are relevant for determining employment status but that:

“No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the considerations which are relevant in determining [whether there is a contract of employment] ‘nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of importance are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.”

However the guidance then goes on to list the factors set out in Figure 1. as those to be considered and most practitioners dealing with employment status in practice would comment that HMRC does tend to look at these as a checklist even though its own guidance specifically states that it is not be used as such. ESM0515 quotes Lord Nolan in Hall v Lorimer [1993] 66TC349 (which HMRC describe as a ‘recent case’) saying “The process involves painting a picture in each individual case”.  Painting a picture is precisely what the Tribunal has done in Christa Ackroyd Media with an in-depth consideration of the nature Ms Ackroyd’s role and what she and the BBC actually did in practice.

The judgement – establishing terms of the hypothetical contract

The Tribunal judgement runs to some 44 pages much of which is concerned with the nature of Ms Ackroyd’s job.  This type of deep analysis should be undertaken by tax advisers to ensure that they fully understand the nature of the hypothetical contract between client and worker and therefore whether IR35 applies. This will become increasingly important if the Finance Act 2017 changes to the treatment off-payroll workers in the public sector are extended to the private sector (it is strongly rumoured that this is likely to be the case). The first Spring Statement (which had not been published at the time of writing this article) may bring us more news.

However to cut through the details of the Christa Ackroyd Media judgement we can follow the roadmap set out by the Tribunal in establishing whether the hypothetical contract was effectively one of employment by the BBC of Ms Ackroyd.

As there is no statutory definition or employment or employee for these purposes, Judge Cannan turned to case law which provides the “classic statement” from Ready Mix Concrete (South East) Ltd v Minister for Pensions and National Insurance [1968] 2 QB 497 that:

“(i) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service, he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contact of service.”

Judge Cannan identifies the first two conditions above as being ‘mutuality of obligation’ and ‘control’ but takes the third a little further saying that if these two provisions are sufficient the hypothetical contract will be one of employment unless it contains sufficiently important conditions indicating the contrary, rather than simply requiring it to be consistent with a contract of employment. This rather reduces the painting required by Hall v Lorimer to more of a pencil sketch.

Mutuality of obligation

Mutuality of obligation is the “irreducible minimum…necessary to create a contract of service” (Carmichael v National Power plc [1999] 1 WLR 2042) and therefore should be considered first in determining whether there is a contact of employment. Without it there is no employment.

On the facts of Christa Ackroyd Media, there is no doubt that there is mutuality of obligation.  Ms Ackroyd was required under the terms of the contract between the BBC and CAM to be available for work at least 225 days per year and the BBC were required to pay an annual fee (payable monthly in arrears) whether or not they actually required Ms Ackroyd to work for all of those days. In practice Ms Ackroyd presented Look North five days per week for the term of the contract. This points towards employment, but on its own is not conclusive.

Control

The Tribunal then moved onto the question of control stating that “the right of control in respect of what is to be done, and where, when and how it is to be done is an important indicator or an employment relationship, but is not by itself decisive.” I believe that most of us would agree with this. For example, I am currently having an extension built onto my house. Sadly this process has not always made me feel like a client, however more to the point I am certainly not the employer of the workmen who have been undertaking the work. I do have control of what is to be done (I want a two story extension), where (at my house), when (now) and how it is to be done (in accordance with the drawings and I would like these tiles on the kitchen floor and this colour paint). The workers choose which tools they use and the order of the jobs done and when they turn up.

This is actually very similar to Ms Ackroyd’s position. The BBC dictated that she must present Look North in its usual slot in the programming schedule, they might require that some particular stories be covered and that Ms Ackroyd followed their editorial guidelines (though there was some dispute over that point). However, Ms Ackroyd could choose other stories to cover, she edited the script so that it was in her own voice, ad-libed and performed unscripted interviews. She chose her own hours and came and went at will. She had complete control over the production of outside broadcasts. Therefore this might suggest that the BBC did not have adequate control over her actions to point to employment however Judge Cannan said that:

“The key question in this regard is not whether in practice the worker has actual day to day control over his own work, but whether there is, to a sufficient degree, a contractual right of control….. [taking] into account the practical realities of a particular industry, considering those aspects of the performance of the work that could be controlled in that industry.”

The starting point in establishing whether control is an express term of the contract, and if it is to a sufficient degree, then one must consider whether that right is actually exercised (Autoclenz v Belcher [2011] UKSC 41). However the judgement referred to a case concerning vicarious liability of the Church for sexual abuse by priests in stating that “as well as the legal power to control, one must also consider control more in the terms of accountability and supervision by a superior” (E v English Province of Our Lady of Charity [2012] EWCA Civ 938).

In reaching its judgement, the Tribunal determined that despite being in charge of her day to day work, Ms Ackroyd was ‘subject to the direction’ of the BBC and while “her role was much more than simply presenting the news and reading a script…..the BBC did have ultimate control in how, where and when Ms Ackroyd carried out her work.”

Intention of the parties

Ms Ackroyd stated that she would never have entered into a contract with the BBC if it meant that the BBC would control the way in which she worked. However the Tribunal felt that “this has only marginal relevance in a finely balanced case as a statement of intention.”

Therefore it is essential that practitioners ensure that the actual contract reflects the intentions of the parties so that statements of intention are not relied upon as this may not determine an unclear position.

Other factors

The Tribunal also considered the other factors relevant to employment status and many of these would point to Ms Ackroyd being self-employed. She provided her own home office and computer for example. She had no employment rights (such as holiday, sick pay or pension) and while she was forbidden to provide a substitute, in a case where it was her personality and individual skills which caused the BBC to approach her in the first place, it is hardly surprising (for example, not many people would be pleased if a plasterer sent his/her partner to render their walls instead of doing it themselves as a skilled trades person).

The length of the contract (seven years), the BBC’s right to terminate, the protection of Ms Ackroyd from financial loss (the fee being payable whether she worked or not) and her personality being part and parcel of the BBC all led to support the Tribunal’s position that the hypothetical contract between Ms Ackroyd and the BBC was one of employment.

What can we learn from this case?

While in Judge Cannan’s own words this is not a “lead case” and it does not lead to any ground breaking changes in law or practice there are some useful learning points:

  • The case presents an unusual set of facts but provides a useful review of the leading judgements in this area of tax law.
  • It makes it very clear that the fact that the HMRC CEST (the online tool to check employment status for tax) disregards mutuality of obligations is an issue for its users.
  • It reminds us that each case must be considered on its own facts. We can expect the upcoming cases where the status of other TV presenters will be tested to further illustrate this point.
  • Public sector engagers should be particularly careful to take note of the key points raised in Christa Ackroyd Media. This is the first IR35 case since the new rules were introduced.
  • Finally good legal/tax advice is key and any contact with HMRC might be relied upon.  Beware.

This article first appeared in Tax Journal in March 2018.

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