IR35 is a term that strikes fear into the hearts of contractors and businesses. The confusion around this ever-changing area of law often means that the latest case developments are overlooked and ignored. In this article we explain the basics of the off-payroll working (IR35) rules, explore the recent developments, and outline what to keep an eye out for in the near future.
What is IR35?
To keep it short and sweet, IR35 is tax avoidance legislation for self-employed contractors and the businesses hiring them.
The aim is to establish whether a worker providing their services through an intermediary (e.g. their own limited company, a partnership, a personal service company, an individual, etc) is truly a worker, or whether they are an employee. This will determine whether they are paying tax correctly (or fraudulently).
If the relationship is truly that of a contractor and business, the individual can pay tax on the basis that they are a private contractor. This is called falling “outside IR35”.
However, if the individual is deemed to be an employee under IR35 rules, they will be liable to pay income tax and National Insurance Contributions like any other employee. This is called falling “inside IR35”. This will not be ideal for the individual as they will be hit with a large tax bill.
How have the IR35 rules changed?
The rules were introduced in the public sector from April 2017. The responsibility was placed on public authorities to decide whether the rules applied to contracted workers who provided their own services through their own intermediary.
This was extended in April 2021 to place the same responsibility on medium and large clients (i.e. businesses) outside the public sector. The shift in responsibility meant that medium and large businesses were urgently required to re-evaluate the employment status of their self-employed workers to ensure they did not fall “inside IR35”.
Small businesses (as defined under the Companies Act 2006) were not included in this change and the responsibility remained on the worker’s intermediary to determine employment status and whether IR35 rules apply.
What is the test to determine employment status?
Unfortunately there is no single test to determine employment status as the law is constantly developing and evolving over time. It is important that individuals and businesses keep up to date with the latest case developments to see how the law is changing.
A good starting point is the case of Ready Mixed Concrete (South East) Ltd -v- Minister of Pensions and National Insurance. This case dates back to 1968 but is still referred to in judgements today. The case set out three main tests to determine whether someone is an employee:
- A person performs a service for a business in exchange for remuneration;
- A business exercises some element of control over the individual who is performing the task (i.e. how and when they complete the task); and
- The other terms of the agreement should not be inconsistent with a contract of employment.
The list of factors to consider when determining employment status has grown significantly over the years. Other key factors include that indicate employment status include:
- Mutuality of obligation: The individual is obligated to accept work from the business;
- Substitution: Personal service is required and the individual is not permitted to appoint a substitute to complete the task in their place;
- Equipment: The business provides equipment and supplies for the individual to use;
- Payment: The individual is paid directly via payroll (e.g. each month) without the need to submit an invoice;
- Tax: Automatically deducted by the employer;
- Contractual label: The terms of the contract state the individual is an employee;
- Uniform: The individual is required to wear a set uniform which is provided by the business; and
- Integration: The individual is integrated into the business (e.g. within the e-mail directory).
In the 2012 case of Autoclenz Ltd -v- Belcher, the Supreme Court looked beyond the terms of the contract and considered the reality of the situation. The contract labelled the individuals at self-employed but in reality the individuals did not have any control over their working style or hours, so they were classed as employees. Consideration was given to the unequal bargaining power between individuals and businesses.
These cases highlight the importance of having a carefully drafted contract that reflects the true relationship between the contractual parties.
What are the latest developments?
The case of HMRC -v- PGMOL reached the Court of Appeal in 2021. It concerned the employment status of referees and whether they were employees or self-employed. The referees were parties of an overarching contract and an individual contract, both of which were considered as part of this case. The take-away point from this case is that a single engagement (contract) can give rise to a contract of employment.
HMRC -v- Atholl House Productions Ltd was one of two appeals heard in the Court of Appeal in April 2022. Focusing on this case, it concerned TV and Radio presenter Kaye Adams’ employment status. HMRC argued she was an employee of the BBC. The hearings can be summarised as follows:
- HMRC found that Ms Adams was an employee of the BBC and therefore liable to back pay taxes
- First Tier Tribunal: Atholl House Productions Ltd successfully appealed HMRC’s decision. The Tribunal set out a test clarifying that a person should be considered an employee where:
- There is mutuality of obligations between the parties;
- There is sufficient control; and
- Where 1 and 2 are satisfied, there are no other factors to displace the conclusion.
The BBC did not exercise sufficient control over Ms Adams. The Tribunal also found that the contract did not accurately reflect the agreement between the parties – and even if it did, the hypothetical contract would not be a contract of employment.
- Upper Tribunal: HMRC unsuccessfully appealed the previous decision. The Tribunal held that the previous First Tier Tribunal decision failed to follow the normal rules of contractual interpretation set out by the Autoclenz case. Despite this, they found no contract of employment in place as the hypothetical contract was business on her own account. This is where a contractor enters into a contract as a business as opposed to a worker./li>
- Court of Appeal: HMRC appealed the decision further. The Judgement supported the opinion that the correct test is mutuality of obligation, control, and no other factors to displace a conclusion that the individual is an employee. The case was passed down to the Upper Tribunal for reconsideration.
We now have some clarity on the correct test to apply, however it is certainly worrying that it has only emerged after several appeals. If the Tribunal’s cannot apply the law correctly, what hope does an independent contractor have? Following this case in particular, many practitioners and commentators have called for a statutory framework on IR35 to avoid uncertainty and great expenditure of taxpayer funds.
The best way to avoid employment status issues is to have a contract in place that reflects the true relationships between the parties. We offer bespoke drafting of consultancy agreements and employment contracts.
We also conduct specialist IR35 reviews to evaluate your current working practices and their compatibility with the most up-to-date case law.
For further information please contact us on 0330 221 0684 or [email protected].
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