IR35 is tax legislation designed to combat tax avoidance by workers supplying services to clients via an intermediary. It was introduced in 2000.
The rules apply where an individual provides services to a client through a Personal Services Company (PSC), and would be regarded as one of the client’s employees had the individual not contracted through the PSC.
The rules are complex, and legislation is evolving as the Government enters into further consultation and new cases appear before the Tribunal. It is important to seek advice on your IR35 status whether you are a contractor or an entity receiving the services of one.
IR35 before 2017
Before April 2017, it was up to the contractor to clarify his or her own IR35 status with HMRC and whether they would be liable to pay income tax and national insurance within their contracting arrangements. The implications are potentially large, as incorrect self-assessment can lead to significant fines. HMRC can go back six years when looking to reclaim taxes it deems liable.
Since April 2017, the onus is now on the public authority to assess the employment status of suppliers in cases where payments are made to a personal services company (PSC) by a public authority, or agencies and third parties that contract with a PSC to supply the services of a worker.
Payments in these cases are subject to deduction of payroll taxes, and it is the Public Authority who will be responsible for tax due on these assignments. This has led to the termination of a number of contracts in the public sector and impacted on the delivery of services.
Private sector IR35 consultation
In the 2017 Autumn Budget, the Government announced that it would consult on extending the public sector off-payroll regime to cover the private sector in 2018.
Under the heading ‘Off-payroll working’, the Budget included the following statement:
‘The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. Early indications are that public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company. It is right that the government take account of the needs of businesses and individuals who would implement any change. Therefore the government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018.’
Traditionally, it has been the contractor’s responsibility to consider the IR35 status and account appropriately to HMRC.
These reforms put the onus on the end-client to ensure that the correct assessments are undertaken. If an assessment is incorrectly made the tax liability shifts to the end-client who will be liable to pay tax and potential penalties.
The employment status test
The key factor in determining whether IR35 applies is to ignore the existence of the PSC, and then test whether there is an employment relationship (as opposed to a self-employed/consultant relationship) – the hypothetical contract.
There are three primary factors to consider when determining whether an employment relationship exists:
- Mutuality of obligation – This is where the employer must be obliged to provide the work and the employee must be obliged to carry out the work in return for pay.
- Personal service – This means the individual is obliged to perform the work personally.
- The employer must exercise a sufficient degree of control over the employee in the way that the individual performs the work including when, where and how.
However, no one factor is determinative. The courts will also look at other factors, including:
- Whether the individual is in business on their own account
- Whether the individual provides their own materials
- Whether the individual is integrated into the business
- The length of the engagement
- Any benefits received by the individual
Recent First-tier tribunal decisions
Recent decisions of the First-tier Tribunal highlight that each case is dependent upon its specific facts.
The tribunal found that the contractor, who supplied his services as night shift manager of a construction site through a PSC, was self-employed. The judge summarised the factors which pointed to self-employment, which included: no notice period on either side; no control, could refuse to work on another site; paid fixed rate per day; no employment benefits.
- Christa Ackroyd Media Ltd v Revenue and Customs Commissioners  UKFTT 69 (TC) (10 February 2018)
The tribunal held that the television presenter was a deemed employee and that IR35 therefore applied to the fees paid to her company. In looking at the characteristics of the hypothetical contract between Ms Ackroyd and the BBC, the tribunal disregarded her lack of entitlement to sick pay and holiday pay, considering instead that if there were an actual employment contract, she would be entitled under employment law to standard employee benefits. The key indicator in this case were the arrangements, which lasted for seven years and required Ms Ackroyd to personally provide services for 225 days a year, which pointed towards a contract of employment. The judge also stated that Ms Ackroyd was ‘economically dependent’ on the hypothetical contract with the BBC, under which the company ‘could control what work Ms Ackroyd did’.
Another ongoing case involving the BBC
Another case was heard last week, involving three other BBC presenters: David Eades, Joanna Gosling and Tim Wilcox.
In this case HMRC raised the same arguments as those in Ms Ackroyd’s case. However, there are differences in the facts of the cases. A number of arguments were put forward on behalf of the presenters.
In relation to two key tests:
- Mutuality of obligation
The presenters submitted that there was no mutuality of obligation. There was no requirement on the BBC’s part to offer presenters any work at all. When assignments were offered there was no obligation on the presenters to accept them. The presenters were only paid for the work that they delivered.
The presenters advanced that there was no control. They claimed that any control that may have been exercised in relation to the end product is no different to the type of control exercised by any client over the services provided by a professional. Unlike in Ms Ackroyd’s case, the presenters did not enter into a seven year contract.
The case concluded last week and we await judgment.
What should contractors do?
In the meantime, this continues to be a challenging area. It highlights the importance for contractors to carry out their due diligence before and during a contract as well. They should obtain advice from IR35 experts to ensure they are compliant rather than face significant penalties and fines.