- 4 mins read
There are only three certainties in life: death, taxes and the complexity of the IR35 rules. The latter of which saw Adrian Chiles taking seven years to eventually defeat HMRC’s claim against his Personal Service Company (PSC) for some £1.7 million in unpaid income tax and National Insurance contributions (“NICs”).
HMRC claimed that the work Mr Chiles carried out under his PSC’s contracts with the BBC and ITV between 2012 and 2017 should be categorised as “disguised employment” for the purposes of IR35’s anti-tax-avoidance legislation.
However, the First Tier Tax Tribunal ruled against this and held that the parallel hypothetical contracts between Mr Chiles’ PSC, Basic Broadcasting Ltd, and ITV and the BBC, were genuine contracts for services and did not create employment relationships. As such, they did not fall within the remit of IR35 legislation.
The legal test:
In assessing the correct status of the hypothetical contracts, the tribunal followed the test established in the leading case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance.
This involved analysing the facts of the case to determine:
- Whether there is an agreement for the alleged employee to provide personal service to the alleged employer in return for wage or remuneration (mutuality of obligation);
- Whether there is a sufficient degree of control over the alleged employee by the alleged employer; and
- Consideration of all other facts and contractual provisions to determine if they are consistent with a contract of employment.
In relation to the first limb, the tax tribunal rejected Mr Chiles’ argument that for an employment relationship to exist, there would have to be an obligation for ITV and the BBC to provide work, and a further obligation for Mr Chiles to personally carry out said work. In the ITV contract, there was no such obligation on ITV to provide work. The tribunal determined that for there to be mutuality of obligations, all that was needed was some obligation on Mr Chiles to work and on the TV companies to pay for this. As this existed, this limb was satisfied.
For an employment relationship to exist, ITV and the BBC would also have to have the right to exercise a significant degree of control over how, when and where Mr Chiles performed his duties under the hypothetical contracts.
In this case, the tribunal found that, although there was a general lack of control at the precise moment when Mr Chiles’ duties were being carried out (i.e. when he was presenting), the hypothetical contracts provided ITV and the BBC with final editorial control, and they could therefore alter the final product before release or even prevent its release entirely. This was sufficient to satisfy the second limb of the test.
As both limb one and two were satisfied, there was a prima facie case for a finding of deemed employment. However, HMRC’s case failed upon an analysis of potentially “the most significant factor”, being whether Mr Chiles was in business on his own account and whether the contracts had been entered into as part of this business. The tribunal found that this was the case.
In determining this, the tribunal analysed Mr Chiles’ entire freelance career and the specific circumstances arising in the relevant tax years of 2012-2017.
This included the fact that Mr Chiles:
- Hired his own personal assistant;
- Utilised the services of and paid 15% commission to an agency management company whose role was to find him work and promote his reputation and career;
- Developed and pitched several of his own ideas to other television broadcasters;
- Frequently wrote columns for multiple national newspapers; and
- Provided his services to around 25 additional clients, which generated further income of over £350,000. Although the majority of Mr Chiles’ income came from the ITV and BBC contracts (c. 75%), the tribunal accepted evidence that these contracts represented less than half of Mr Chiles’ active working time.
Standing back and looking at all of these factors, the tribunal determined that they demonstrated that Mr Chiles was in business on his own account and ITV and BBC were two clients of his business. This was inconsistent with a finding that there was deemed employment.
This case shows the complexity involved in the IR35 rules which can lead to uncertainty for contractors and clients alike, and potentially lengthy litigation.
Each case will turn on its facts and the absence of a single test for establishing employment status means that it can be far from clear in each case which side of the line a contractor will fall.
Whilst this case will be a welcome result for contractors and clients alike, and a blow to HMRC, it should be remembered that this was a first tier decision and, whilst indicative of the way in which the tribunals may approach cases, will not set precedent.
With the potentially severe penalties that HMRC can impose under the IR35 rules for unpaid taxes, it is recommended that advice is taken when providing services through a PSC or engaging a PSC to provide services.
For more information on this article, please contact Su Apps.