Recent Cases Highlight Ongoing Issues With IR35

The intermediaries legislation, known as IR35 for short, is designed to stop individuals that are essentially employees from avoiding certain income tax and national insurance obligations by contracting through their own limited company. Examples of individuals that may contract through their own limited company include independent contractors or freelancers.

While IR35 has been around since 2000, the legislation has increasingly been in the public eye due to a number of high-profile IR35 cases, as well as recent reforms to how IR35 is applied in the public and private sector.

This renewed attention on IR35 has highlighted how difficult it can be to interpret this area of legislation correctly, which is disconcerting given the upcoming reforms to the private sector.

HMRC is on a losing streak

While HMRC is fully entitled to challenge the IR35 position of a taxpayer, HMRC has lost many IR35 cases in the courts and tribunals, with some of the more recent high-profile losses involving television and radio personalities Lorraine Kelly and Paul Hawksbee.

In the case of Albatel Ltd, Lorraine Kelly (an ITV presenter), successfully appealed a £1.2 million tax bill from HMRC. One of the main deciders in the case was the matter of control, with the tribunal finding that the level of control present was far below the level required to meet IR35 rules.

In the case of Kickabout Productions, Paul Hawksbee, a Talksport radio presenter, challenged a ca. £140,000 bill from HMRC in respect of tax spanning between 2012 and 2015. Again, the issue of control was considered, among other matters such as the obligation to provide work, and the tribunal concluded that "Looking at the picture as a whole, we conclude that the relationship in this case was not one of employment but rather was a contract for services."

While the issue of control (or lack thereof) has helped some taxpayers successfully challenge IR35 determinations by HMRC, it doesn’t always work out in the taxpayer’s favour.

One of the few IR35 cases that HMRC has won is that of Christa Ackroyd (Christa Ackroyd Media Ltd). In this case, the tribunal found that "the BBC did have ultimate control in how, where and when Ms. Ackroyd carried out her work.".

Although control is important to the courts and tribunals when considering an IR35 case, it’s not the only issue that’s considered. Other factors that could be considered include:

• Whether there is a mutuality of obligation;
• Whether there is a right to substitution;
• Whether an individual provides their own equipment; and
• The extent to which an individual is integrated into an organisation, among others.

In fact, the complexity of IR35 cases has meant that some cases have been decided on value judgements (such as the Christa Ackroyd case) meaning that another judge may have come to a different conclusion. Hawksbee’s appeal, for example, was only successful due to a casting vote by Judge Thomas Scott.

This apparent lack of certainty when ruling on IR35 cases highlights how difficult it can be to correctly interpret the legislation. This doesn’t bode well if you’re a contractor or business and need to decide whether IR35 is in scope for you.

Issues with CEST tool

Another area of IR35 that has been subject to criticism is HMRC’s "Check employment status for tax" (CEST) tool.

Introduced in April 2017, the service, according to HMRC "will give you the view of HM Revenue and Customs (HMRC) on whether:

• the intermediaries legislation (known as IR35) applies to an engagement
• the off-payroll working in the public sector rules apply to a public sector engagement
• a worker should pay tax through PAYE for an engagement"

While HMRC has said it will stand by the answer provided by the tool unless the information entered is inaccurate, there are some problems with the tool itself.

For example, there are factors, such as the mutuality of obligation, that are often considered by the courts and tribunals when reaching a decision as to whether IR35 should apply. However, the CEST tool barely covers mutuality of obligation.

Additionally, the tool doesn’t always provide an answer and may produce a "false positive" under certain circumstances.

HMRC has said it aims to improve the CEST service so that it can be more effective, and plans to have these improvements in place before the IR35 private sector reforms roll out, but it seems as though considerable steps will need to be taken to get the service up to scratch.

Reforms to IR35 continue despite problems

These questions around the clarity of the IR35 legislation are all the more worrying given the fact that HMRC continues to pursue reforms in this area.

In April 2017, reforms to how IR35 operated in the public sector came into effect. Under the changes, a deduction at source rule was introduced and it became the responsibility of the payer, for example, a public authority or agency, to determine whether a contractor was subject to the IR35 legislation.

On 11 July 2019, an extension of the reforms to the private sector was announced. Namely, where an individual works for a medium or large business through their own limited company, "the organisation will become responsible for assessing the individual’s employment status and, where applicable, deducting and paying employment taxes".

Small businesses should not be subject to these changes and should continue to operate under the existing rules.

These reforms are not due to take effect until April 2020, which gives businesses at least a few months to prepare.

HMRC’s insistence on extending IR35 reforms to the private sector has been met with criticism from many groups, not least due to the additional operational burdens that businesses are likely to face.

Some have even called for the private sector changes to be postponed, with the Institute of Chartered Accountants in England and Wales stating that "April 2020 is too soon: Adequate lead time will be needed if off-payrolling changes are made in the private sector, so, if implemented, go-live should not be before April 2021".

Even in the judgement of the Paul Hawksbee case it was noted "The reforms to the off-payroll working rules are also due to be implemented next year. In our view, increased clarity is badly needed."

For now though, calls for delays have fallen on deaf ears, meaning businesses and contractors alike should prepare themselves for the upcoming changes.

If you think that you might be within the scope of IR35 or want to know more about the changes to how IR35 is applied in the public or private sector, speak to your accountant or tax adviser for further information specific to your circumstances.

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Further Reading

Spring Statement 2022: What it means for small businesses

How to manage the final hospitality VAT rate increase in AccountsPortal

Ten Purchases You Didn't Know Were Tax-deductible