In Albatel Ltd v HMRC, the First-tier Tribunal (FTT) held that the so-called IR35 legislation (contained in section 49, ITEPA 2003 and Regulation 6, Social Security Contributions (Intermediaries) Regulations 2000) did not apply to the provision of services by the well-known TV presenter, Lorraine Kelly, to ITV.
Albatel Ltd (Albatel), is the personal services company (PSC) of Lorraine Kelly (Ms Kelly). Albatel contracted with ITV Breakfast Ltd (ITV) to provide the services of Ms Kelly in relation to the television programmes Daybreak and Lorraine.
HMRC relied on the IR35 legislation which, if applicable, treats fees paid to PSCs as the deemed salary of the worker rather than company revenue. As such, the fees are subject to PAYE and NICs rather than corporation tax.
Ms Kelly was under an obligation to personally perform services for ITV. There was no actual employment contract between Ms Kelly and ITV. HMRC considered that the IR35 legislation applied because, had there been a direct contract between Ms Kelly and ITV (the Hypothetical Contract), it would have been a contract of service, an employment contract, rather than a contract for services.
HMRC therefore issued PAYE and NICs decisions to Albatel in the sum of £1.2m.
Ms Kelly also incurred agency fees which were paid to her agent, Roar Global Ltd (Roar Global) by Albatel. HMRC contended that those agency fees were not deductible expenses pursuant to section 352, ITEPA 2003.
Albatel appealed to the FTT.
The FTT was required to determine:
- w hether the Hypothetical Contract was a contract of service ie an employment contract, or a contract for services which would mean Ms Kelly was an independent contractor, and
- if the Hypothetical Contract was one of service, and therefore the IR35 legislation applied, whether the agency fees paid to Roar Global by Albatel were a deductible expense.
The Hypothetical Contract
HMRC contended that mutuality of obligation was clearly evidenced as Ms Kelly was obliged to perform if called upon by ITV to do so, there was a guaranteed minimum payment under the contract and certain contractual terms, such as providing Ms Kelly’s services for up to 42 weeks to allow for holidays, were akin to an employment contract.
HMRC relied on Christa Ackroyd Media Limited v HMRC, to argue that despite there being no express term dealing with control, ITV clearly had control over the ultimate output of Ms Kelly’s shows and had a veto over, for example, suggested guests. Although no situation had arisen where ITV had exercised its veto.
Viewed as a whole, HMRC argued that the Hypothetical Contract was an employment contract.
Albatel argued that the nature and range of Ms Kelly’s work (both for ITV and more broadly) meant that she should be treated as being self-employed and the IR35 legislation cannot be invoked so as to deem there to be an employment relationship where one does not exist.
Responding to the criteria identified in Ready Mixed Concrete (South East) Limited v Minister of Pensions & National Insurance, Albatel argued that there must be mutuality of obligations which required the provision of Ms Kelly’s services, not those of a substitute. Albatel highlighted that Ms Kelly’s services were provided for 42 weeks of the year, and for the weeks outside of that period Ms Kelly was instrumental in finding a substitute presenter for the programmes. Additionally, there was no obligation for Ms Kelly to provide any services to ITV, it merely had the right to call on Ms Kelly “on an exclusive first call basis”. Indeed, ITV had broad powers to terminate the contract for reasons outside of Ms Kelly’s or Albatel’s control.
Albatel also contended that Ms Kelly had a significant degree of control over her performances. In contrast to the presenter in the Christa Ackroyd case, ITV had no right to instruct Ms Kelly or Albatel what to do. Ms Kelly controlled the interviews she carried out and chose how to manage her schedule. Additionally, it was clear that many of the clauses in the agreement were industry standard and neither party felt completely bound by the terms. For example, Ms Kelly undertook other activities, such as a documentary trip to Antarctica for another broadcaster, despite the terms of the contract and ITV consented to these activities.
Ultimately, the overall arrangement was not consistent with that of an employment contract. There was a financial risk for Ms Kelly and Albatel, ITV could terminate the contract, there was no ongoing obligation for ITV to pay for Ms Kelly’s services, and Ms Kelly was not subject to fixed hours.
The FTT considered that the principles relevant to its consideration of the nature of the Hypothetical Contract were:
- mutuality of obligation
- sufficient degree of control
- existence of a right to substitute
- whether the worker was in business on her own account, and
- the duration of the contract, degree of continuity and whether the worker was “part and parcel” of the organisation.
The FTT also considered the wider circumstances including the conduct of the parties and the actual contractual terms.
The FTT concluded that Ms Kelly was personally obliged to perform the services. ITV was obliged to pay Ms Kelly and there was an expectation that Ms Kelly would work for 42 weeks of the year. However, ITV was not obliged to call on Ms Kelly. Although there was mutuality of obligation, it only amounted to an “irreducible minimum”, which was not determinative of an employment contract.
The FTT held that Ms Kelly had a sufficient degree of control. She was engaged for her specific skills and used her skills as she saw fit, with a free rein; she provided the programme in any manner she considered appropriate and was free to carry out other work and activities without any real restrictions. Additionally, Ms Kelly was not entitled to sick pay, holiday pay or other employee benefits, nor was she entitled to training or appraisals by ITV. The FTT therefore concluded that the Hypothetical Contract was one for services, rather than a contract of service and that the IR35 legislation did not apply.
By determining that the IR35 legislation did not apply, the FTT was not required to make a decision on whether the agency fees were a deductible expense, however, at the request of the parties, it did decide this issue.
Section 352(1), ITEPA 2003, provides that “a deduction is allowed from earnings from an employment as an entertainer for agency fees”. Section 352(4) defines “entertainer” as “actor, dancer musician, singer or theatrical artist”.
HMRC contended that the only agreement was between Albatel and Roar Global, rather than Ms Kelly and Roar Global. It relied on the fact invoices were addressed to and paid by Albatel. As such, it argued the fees were not deductible as expenses incurred by Ms Kelly.
Additionally, HMRC argued that Ms Kelly was not an actor, dancer, musician or theatrical artist. She was merely a lead presenter on a morning television show. Relying on Madeley & Finnigan v Revenue & Customs, HMRC submitted that there was no evidence of regular sketches on the shows and Ms Kelly was under no obligation to attend rehearsals as she was not acting out a part.
Albatel argued that although Ms Kelly was a sole presenter, the performances she gave were undoubtedly theatrical and the sketches she performed were clear examples of her being an entertainer.
The FTT rejected HMRC’s contention that there was no contract between Ms Kelly and Roar Global. The FTT found that a contract existed between Roar Global and Ms Kelly as both an individual and Albatel. The fact that the invoices were paid through Albatel did not alter this.
In considering whether Ms Kelly was an “entertainer”, the FTT said that Ms Kelly’s role was to provide light entertainment, regardless of whether that was on the Daybreak news programme or on Lorraine. The FTT concluded that the programmes were light in nature and Ms Kelly regularly dressed up in skits and ad-libbed live on air. The services provided by Ms Kelly were a performance, presenting a persona of herself which was the brand that ITV sought to engage.
This decision is a setback for HMRC, who continue to challenge the employment status of a large number of taxpayers. Although HMRC was successful in the Christa Ackroyd case (it is understood that decision is on appeal to the Upper Tribunal), it has since suffered a number of defeats on the issue (see MDCM Ltd v HMRC and Jensal Software Ltd v HMRC).This decision highlights the difficulties businesses are likely to face from April 2020 when the IR35 legislation will be extended to the private sector. Businesses will be required to determine the IR35 status of contractors who use PSCs and they will be subject to penalties if they get it wrong.
Given the importance HMRC attaches to the IR35 legislation and the employment status of workers, HMRC is likely to continue to challenge taxpayers in this area.