At a time when we are awaiting the introduction of IR35 reform in the private sector and improvements to HMRC’s online CEST tool, intended to provide guidance to those required to make a decision on IR35, the recent IR35 cases heard at the tribunals will have had the opposite effect to that desired by HMRC.
In more recent years, and particularly since the announcement of IR35 reform in the public sector which came into effect in 2017, HMRC has pursued more high-profile cases with clients including the likes of ITV and the BBC, presumably with a view to justifying the need for reform.
However, what the recent IR35 cases reiterate to me, are the risks of contractors and clients relying on HMRC tools such as CEST and its guidance.
Current criticisms of CEST highlight that the tool does not address one of the fundamental principles that can determine IR35, mutuality of obligations; nor does it allow the user to consider when a contractor is ‘in business on its own account’.
Furthermore, as it should go without saying, CEST and other HMRC guidance is based on HMRC’s interpretation of case law. In this case HMRC’s approach to determining IR35.
The recent cases, involving publicly known personalities, highlight fundamental issues with HMRC’s approach to IR35.
Quite apart from having the effect HMRC were seeking (to deter what HMRC believe to be rife non-compliance of IR35), they reveal a picture of HMRC not approaching IR35 in the way ‘clearly’ set out by case law.
In the cases involving Lorraine Kelly and Kaye Adams, best know for her work on Loose Women, as the ‘worker’, HMRC sought to rely on the written contractual arrangements with little regard to the working practices.
Wrong focus…
The two most recent high-profile cases to reach the tribunal have several things in common, in addition to being in relation to well-known personalities.
Firstly, the appeals involved, either in whole or in part, contracts for broadcasts including the individuals’ name. In respect of Lorraine Kelly, it was the contract relating to ‘Lorraine’ on ITV and in respect of Kaye Adams, the contract for ‘The Kaye Adams Program’ for BBC Radio Scotland.
Secondly, HMRC’s case in respect of both was based heavily, if not soley, on the written contractual arrangements.
Thirdly, the ladies had been freelancing through their companies well before the original IR35 legislation came into effect, entering into contracts with many clients.
Fourthly, HMRC did not call any witnesses to supports its case.
Contractual arrangements
It is unclear why HMRC took the approach it did in these cases, with heavy reliance on the written contractual arrangements to the exclusion of working practices.
One could presume they became too focused on the high profile a win such cases could bring, the figures involved, or the perceived personal service element of the contract; or maybe the perceived control of industry guidelines following its success in the Christa Ackroyd case (which as I write this article is having its appeal heard at the Upper Tier Tribunal).
Whatever the reason, these cases, far from being the persuasive tool HMRC might seek to prove its suggestion that contractors are not correctly applying IR35, have demonstrated that HMRC frequently interpret the legislation incorrectly.
How then can contractors and clients place reliance on a tool designed by HMRC to draw the correct conclusion for IR35 in respect of its contracts?
Incidentally, the fact the contracts were in respect of contracts including the personalities name, did not automatically mean personal service was required. In making its conclusions in respect of this fundamental factor, the tribunal looked at the written terms and the working practices as it would with any other contract.
More importantly however, is the criticism of HMRC’s approach in which it seemingly ignores the working practices in favour of the written terms.
This is neither the approach the legislation requires us to adopt to create the hypothetical contract that would exist if the relationship were directly between the client and the worker, which clearly states we should looks at all relevant terms, including but not isolated to written terms. Nor, as the judge’s put it in the case involving Kaye Adams, the approach case law tells us to adopt:
“It is quite clear from the Supreme Court…that the correct approach to adopt in all cases is to identify the actual legal obligations of the parties” and that in doing so the court must examine all relevant evidence.”
Stating further, that where working practices are so persuasive the tribunal can infer this accurately reflects the terms of the actual (hypothetical) agreement, even where contrary to the written agreement.
Taxpayer’s success
In both cases the tribunal found that IR35 did not apply to the contracts.
In the case of Lorraine Kelly, predominately due to a lack of control, which the judge went so far as to say the:
“level of control falls far substantially below the degree required to demonstrate a contract of service”.
This conclusion, while taking into account the industry guidelines and written terms, was made based on the working practices, leading the tribunal to conclude that Kelly had the discretion to decide the manner, means and method by which she performed the services.
Kaye Adams contracts involved a more collaborative approach between her and the client, which HMRC sought to liken to the Christa Ackroyd’s case; and where none of the fundamental factors determining IR35 were found to be conclusive.
The judge, however, highlighted the many differences between this case and that involving Christa Ackroyd, concluding Adams contract was not within the IR35 legislation as looking at ‘all the evidence’ she was in business on her own account.
An important factor in both cases was despite an implication to the contrary in the written terms, neither ITV or the BBC respectively, had first call on the workers services and they were not required to obtain the client consent before taking on other work.
Highlighting just one area where HMRC’s approach to rely on the written terms alone was incorrect.
What we can take from these cases
Generally, in my experience, HMRC often neglects to take a commercial approach when determining cases. Yet, a more fundamental failing occurred here…not taking into account all the evidence.
Such failings, despite the ‘clear approach’ the courts have set out, demonstrate the importance of seeking specialist advice being key to determining an accurate IR35 decision; and for clients required to make the determination, attracting quality and expertise in its contractors.
There is no specific appeal process for contractors who believe a client has incorrectly determined IR35, nor is there expected to be one for the off-payroll reform for the private sector.
Contractors and clients who decide to base IR35 decisions solely on HMRC guidance can only be at a disadvantage.
With no formal appeal process for contractors who believe a client has incorrectly determined IR35 and the current consultation for reform in the private sector suggesting clients must have a procedure for hearing the contractors’ views of IR35, it is vital you use this opportunity to get your point across.
In addition, the implications of clients engaging contractors by other means, could, without the proper due diligence, cause more potential risk to clients and contractors than it would first appear.
Such alternatives including third parties can be extremely well marketed. However, contractors and clients alike should always seek independent advice in respect of such prospects in order to assess potential risks to its businesses.
How do I decide if IR35 should be applied to a contract?
My advice, simply put, is by not solely relying on HMRC’s CEST.
The recent tribunal cases alone demonstrate the faults in HMRC’s approach; an approach followed to produce its guidance, including CEST.
It is common knowledge that CEST does not address the fundamental factor of mutuality of obligation and in addition, does not enable the user to draw a conclusion on IR35 based on the secondary test of whether a contractor is in business on its own account.
Whether you are a contractor or a client responsible for the determination of IR35, it is important that you seek specialist advise and keep a record of how you came to your conclusion on IR35 for each contract.
This will ensure you can defend your case should HMRC open an IR35 enquiry; and for clients, enable you to continue to attract the quality and expertise required to fulfil projects to a high standard.
