Two cases recently hit the headlines, in which HM Revenue & Customs (HMRC) challenged the tax status of high profile individuals engaged by ITV and the BBC via personal service companies (PSCs). Presenters Lorraine Kelly and Kaye Adams's PSC arrangements were challenged by HMRC which claimed that without the intermediate PSC they would have been employees working for those organisations, although on appeal this was found not to be the case. These and other similar cases signify a drive by HMRC to apply personal tax status correctly, and foreshadows a tightening of the rules on self-employment versus employed status from a tax perspective.
Off-payroll working rules, commonly known as IR35 rules, apply where an individual (a worker or contractor) provides services through an intermediary such as a PSC to another person or entity (the client). The purpose of the IR35 legislation is to treat fees paid to a service company as deemed salary to the worker which is subject to income tax and National Insurance contributions (NIC) (less certain deductions allowed under the rules). HMRC considers that IR35 applies if the worker would be an employee of the client if there was no intermediary PSC.
If the relationship genuinely falls outside the IR35 rules then both workers and their hirers can take advantage of the tax efficiency of working through a limited company. Clients don't have to pay employers' NIC or provide employee benefits to contractors. The individuals themselves benefit from tax efficiency.
However, HMRC has long been concerned with the ambiguity of interpretation of IR35 where in practice the contractor is essentially working as an employee. Currently, the government calculates that the cost of non-compliance with IR35 in the private sector is growing and will reach £1.3 billion a year by 2023/24.
In a bid to regularise the situation, from April 2017 public authorities became responsible for deciding whether workers would have been regarded for income tax and NICs purposes as employees if they were engaged directly. Where relevant, the public authority or agency that pays the worker's PSC became responsible for accounting for and paying income tax and NIC to HMRC, on behalf of the worker.
New rules will come into force on 6 April 2020 for the private sector which will bring it in line with the public sector. The responsibility for determining whether the off-payroll working rules apply will move to the organisation receiving an individual's services. The Government makes clear that employment right issues, such as proposals for aligning differences between the tax and rights frameworks for employment status as set out in the Good Work Plan are outside the scope of this reform.
Recent Government consultation has provided more detail on how the new rules are expected to work.
Who will it apply to: Small company exemption
The consultation proposes that the smallest end users will not be affected by the reform. Broadly this uses the Companies Act 2006 definition of a small company where if in a year it satisfies two or more of the following requirements:
- that annual turnover is not more than £10.2 million
- its balance sheet total is not more than £5.1 million
- it has no more than 50 employees.
Anti-avoidance provisions are envisaged to prevent off-payroll workers being routed to small associated companies connected to a large end user client.
Liability for non-payment of income tax and NICs
Where there are multiple parties the business (eg "fee payer" or agency) which pays the PSC will usually be liable and responsible for deducting PAYE and NIC if the worker or contractor is inside IR35. However, the liability for income tax and NICs to be transferred from one party to another if certain circumstances already exist, for example, where a client fails to provide a determination and the Government wants to retain and extend this, so that the end user or client should assess whether or not a contractor falls within the IR35 regime. This could increase supply costs and also lead to regular audits of the supply chain to ensure compliance.
Access to information in the labour supply chain
The government wants to legislate to ensure that the IR35 determination and its reasons are cascaded to all parties in the labour supply chain to ensure that they comply with their obligations. This would go further than is currently required by the public sector rules which do not require a tax status determination to be supplied by the client to the off-payroll worker directly.
Would workers have the right to challenge an IR35 determination by the client or fee-payer?
The government is considering its approach to this issue, but currently believes that the most effective approach would be for clients to develop and implement a process to resolve disagreements based on a set of requirements set out in legislation. There is no mention of the remedy a worker would have if the determination was incorrect.
Situations where part or all of the contractual chain is located outside the UK
Existing provisions which address anti-avoidance will continue to apply. If an agency or other fee-payer is offshore, liability moves to the party in the contractual chain which is in the UK, with ultimately the client being liable. Where a party in the contractual chain, including the client is outside the UK but the off-payroll worker performs services in the UK, fee-payers must still deduct tax and NIC.
How should the off-payroll working rules be applied in relation to "contracted out" services?
Where an end user receives contracted out services from a third party in the private sector, (eg an outsourcing company which doesn't supply labour as part of its services), it is not required to consider IR35. However, where it enters into a contract for labour supply it would be required to consider whether the off-payroll working rules applied. Users of such third parties will need to be very clear about whether they are being supplied services or labour.
Practical ways for businesses to prepare for April 2020
- Identifying individuals in your workforce (including those engaged through agencies and other intermediaries) who are supplying their services through PSCs.
- Using HMRC's Check Employment Status for Tax service to identify whether the off-payroll rules are likely to apply to any contracts that already extend beyond April 2020.
- Speaking to your contractors about whether the off-payroll rules apply to their role.
- Putting in place processes to determine if the off-payroll rules apply to future engagements and how payments will be made to contractors within the off-payroll rules.
The relationship between the off-payroll working rules and employment
The government consultation makes clear that while a deemed employment relationship will place an individual within the IR35 regime and require NIC and tax be deducted from payments made to the worker's PSC, it does not result in employment rights or statutory payments obligations for the deemed employer or fee-payer. Deciding on whether the off-payroll regime is engaged has been vividly illustrated and widely publicised in a couple of recent cases involving TV presenters.
Atholl House Productions Ltd v HMRC
Ms Kaye Adams presents programmes both for the BBC and other organisations. HMRC initially assessed that IR35 applied to arrangements between her PSC and the BBC and that she was liable for PAYE income tax and NIC. Through her PSC, she appealed the decision. The First-tier Tribunal considered her relationship with the BBC and whether a hypothetical employment contract could be inferred. It decided that such a situation did not apply in Ms Adams case and so her PSC fell outside the IR35 regime. Key findings were the BBC's lack of control over the presenter carrying out other engagements (and the parties were unaware of terms limiting this) and her substantial work for other organisations. It found that her "professional identity" and remuneration were linked more closely with her non-BBC engagements. That she had carried out freelance work for years was "significant" and was relevant in determining current employment status.
Albatel Limited v HMRC  UKFTT 195 (TC)
HMRC also decided that payment of income tax and NIC for was payable in relation to the engagement between TV presenter Lorraine Kelly and her client ITV Breakfast Ltd (ITV) because if there had been a direct contract it would have been for a contract for service. Ms Kelly's PSC Albatel appealed this decision and the First-tier Tribunal held that the arrangement did not amount to a hypothetical contract of employment between the presenter and ITV. Considering the overall circumstances of the arrangement, the tribunal accepted that Ms Kelly carried out a wide variety of work for other clients during her time working with ITV without any real restriction. She had been providing her services through an intermediary company without challenge since 1992. When working with ITV she retained control of decisions on the running order of the programme, the items to feature and the angle to take in interviews. In the Tribunal's view "ITV was purchasing the product, namely the brand and individual personality of Lorraine Kelly."
In preparing for next April's reforms agencies, suppliers and clients will all need to ensure that they are clear on what basis individuals are engaged through PSCs. Levels of control, the degree to which other independent activities are carried out and other factors which could indicate employment status are all relevant in assessing whether or not IR35 rules come into play.