Tax

What is IR35 and what does it mean for you?

The ‘Intermediaries Legislation’ commonly known as IR35 is almost 20 years old and despite the passage of time, things around employment status are less clear than at the time of its introduction.

A brief history

The term ‘IR35’ came from a press release reference (Inland Revenue 35).

The legislation was introduced by Gordon Brown in his 1999 Pre-Budget speech and subsequently implemented in the Finance Act for April 2000. Since then, it has hardly been out of the news.

This is certainly no less true in the last couple of months, where we have seen two high profile cases pass through the tribunals.  Both with conflicting outcomes.

Case 1: Christa Ackroyd Media Ltd

The BBC engaged Christa Ackroyd through her personal service company (PSC), Christa Ackroyd Media Limited (CAM), to co-present their Look North Programme on a seven-year contract.

In 2013, after a three-month period off air, Ackroyd was sacked.

At the time, it was reported that the sacking was because of an alleged dispute concerning her employment status and payment of tax. Later, this was supported by documents produced to the Courts revealing the BBC terminated CAM’s contract after HMRC issued a formal demand for unpaid tax to Ackroyd’s company.

Employed or not?

Despite Ackroyd’s insistence to the contrary, HMRC successfully argued before the First Tier Tribunal (FTT) that she was hypothetically engaged under a contract of service (employed contact) rather than one for services (a self-employed contract).

The FTT’s ruling stated that she was “economically dependent on the hypothetical contract with the BBC”, which took up most if not all her working time and a ”…hypothetical contract of that length… and terminable only for a material breach points towards a contract of employment.”

The penalty

The FTT ruled the TV personality’s contract was caught by IR35 and landed her company with an eye watering £420,000 bill.

Case 2: Mark Daniels – MDMC Limited

Barely had the cacophony of pundits’ opinions died away when, bizarrely in March 2018, another IR35 case came before the FTT adding further layers of complexity and uncertainty.

Mark Daniels provided his services to Structured Tone Limited (STL) through a PSC engaged on contract by Solutions, a recruitment agency.

Contractor wins against HMRC

HMRC determined in 2016 that the contract to provide services on large construction projects should have been caught by IR35, and the service company should have paid PAYE and NIC.

Daniels successfully appealed, with the FTT finding the engagement was for services and Daniels should not be treated as an employee.

Lack of rights

A key factor influencing the FTT’s decision is the lack of a notice period, holiday pay or any employment benefits under the hypothetical contract. Which would have to be present if Daniels had been engaged directly as an employee.

Interestingly, the FTT dismissed “control” as a factor by concluding that in a large project there is a clear structure to the work that had to be done and that an individual working within that structure was not being controlled by the end user.

Many accountants leave it to their client to decide

The recent rulings only serve to highlight just how difficult navigating this complex area of taxation legislation can be.

In fact, many accountants choose not to advise those working through a PSC or other intermediary on whether they are caught by IR35 legislation.

They prefer, instead, to leave the decision to their clients after drawing their attention to the factors they need to take into consideration. Alternatively, they outsource the responsibility for making the ultimate decision to a specialist IR35 review service.

HMRC’s online tool to determine status

HMRC has a “Check Employment Status for Tax” (CEST) tool “to find out if you, or a worker on a specific engagement, should be classed as employed or self-employed for tax purposes.”

The Government services and information website states “This service can be used for current or future engagements in the private or public sector.” It also states “HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate.”

Great news you might think?

However, there are many who do not trust the HMRC tool. Recently, Andrew Chamberlain, deputy director of policy and public at the Association of Independent Professionals and the Self Employed (IPSE) is quoted as saying the tool “cannot be relied upon to make correct determinations, which is why many organisations feel forced to take a blanket approach – pushing all off-payroll engagements  into IR35 unfairly.”

Performance is everything

It is worth noting, irrespective of whether a contract is deemed to be IR35-proof or HMRC’s CEST tool rules it to be for a supply services (outside of IR35), ultimately it is not what the contract says it is how the duties are performed that really matters.

Off-payroll Working

New IR35 rules concerning “Off-payroll Working” in the public sector came into effect 6 April 2017. Their objective was to shift responsibility for deciding if IR35 applied from the intermediary-worker to the public-sector engager.

Where an engagement is deemed to fall with the new IR35 rules the person paying the PSC (that is the public-sector body or third-party-agency) is responsible for deducting tax and NICs under PAYE.

In many instances, public-sector bodies have made blanket decisions that workers providing their services through an intermediary are caught under the new rules even when they clearly are not.

Where does that leave us now?

The recent flurry of FTT cases, combined with last year’s legislative changes only serve to underpin how difficult it is to navigate the intermediaries’ taxation legislation.

Worryingly things could become even more complicated if Phillip Hammond’s stated intention to widen the reach of Off-payroll Working legislation to the private sector becomes reality.

The only glimmer of hope is for the plethora of employment status consultations issued in response to the Matthew Taylor review of the “Modern Labour Market” result in establishing better “tests that define the boundary between those currently taxed as employees and those who are taxed on a self-employed basis.”

Brian Palmer is the tax policy adviser for AAT.

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