Eye on the ball: How NOT to fall foul of IR35
In March 2023, after a battle of almost six years, football pundit, TV presenter and former England footballer Gary Lineker won his £4.9m tax case against HMRC. The prosecution alleged that the presenter was operating outside IR35 across three contracts held with BBC and BT Sport.
Unsurprisingly given the amount of money at stake, on 12 June 2023 HMRC filed an appeal against this decision. It suggests that HMRC is keen to reverse the court’s original decision to stop a precedent being set by the Lineker case.
The crux of this issue lies in the use of partnerships to circumvent IR35. The consensus among respected tax dispute professionals is that HMRC’s appeal will not be successful, yet it’s a useful case study that goes a long way to highlight the complexities of IR35.
What is IR35?
IR35 is shorthand for the UK off-payroll tax legislation that is designed to spot businesses and contractors that are working as ‘disguised employees’, often working on a self-employed basis and/or under an umbrella company, to avoid paying the appropriate tax and NI contributions. Being found inside IR35 means that a contractor is deemed to be an employee for tax purposes. They will pay income tax and national insurance contributions at the same rates as a permanent employee. This classification can significantly impact a contractor’s financial earnings and the way they manage their personal service company or limited company in the future.
If a contractor is ‘outside IR35’ they may pay themselves a salary and draw the remainder of income as dividends. Understandably, this is the preferable financial option for many contractors in both the public and private sectors, but they cannot afford to take their eyes off the ball to ensure they are playing within the rules.
Winning against HMRC
Other high-profile IR35 cases have also been subject to HMRC investigation. Daytime TV queen Lorraine Kelly successfully argued ‘outside IR35’ and the £1.2million case for tax and national insurance that had been bought was dismissed. Kelly’s successful defence serves as useful guidance for contractors around the indicators of genuine self-employment:
Mutuality of Obligation (MOO): an employer is obliged to provide consistent and paid work for the employee, and the employee is obliged to carry out the work as instructed. HMRC expects to see a different relationship between contractors and clients. Being able to say no on both sides of the engagement is a signpost of a true contractor-client relationship. One of the biggest criticisms of the CEST tool is that it doesn’t include mutuality of obligation.
Supervision, direction and control: a truly self-employed individual, while working to a brief or contract would have a high degree of control over how and when that work was carried out, whereas employees are supervised and subject to specific directions.
Personal service and substitution: one of the major indicators of IR35 status is whether the relationship between the client and contractor is one of ‘personal service’. One way to avoid this is to have a right of substitution in contracts. So, if the contractor is unable to do the work, they can provide someone to do it instead, delivering the same service and/or contract to the client.
Number of clients: Having several clients at once is a strong indicator of genuine self-employment, so contractors should try to make sure that they work for multiple businesses.
Financial risk and benefits: In her winning case, Lorraine Kelly argued that she did not receive employee benefits such as sick pay or a pension. HMRC is looking for evidence that a self-employed person takes on the risk of their own business as an indicator of genuine self-employment.
Business presence: For a contractor to qualify as self-employed, HMRC will also consider evidence that indicates that the business exists outside of the relationship between the contractor and one client. This could be things such as a website, letterheads, business cards and business insurance.
Equipment: Employees can expect to be given equipment to help them do their jobs such as a laptop, mobile phone, and company car, whereas those who are self-employed are expected to provide their own equipment.
The ‘golden tests’ of self-employment
Presenter of ITV’s Loose Women Kaye Adams, through her limited company, Atholl House Productions Limited (AHPL) was subject to an IR35 audit in 2019. HMRC asserted that Adams failed to meet the three ‘golden tests’ of self-employment:
- Mutuality of Obligation (MOO)
- No realistic right to substitution
- The BBC exercised control over her output
It was the evidence of 20 years of freelance employment and Adams’ contracts with other clients that led to the decision that Adams was operating a business on her own account and not as an employee of the BBC.
In another example, radio and TV host Adrian Chiles won his seven-year battle with HMRC. Chiles provides his services through his personal service company Basic Broadcasting Limited. HMRC argued that he was within the scope of IR35 and that additional tax and National Insurance contributions were due from Basic Broadcasting Limited amounting to c£1.7m. A robust defence was put forward by Mr Chiles and his representatives to demonstrate that he was in fact a contractor.
Whilst the outcome of these cases is encouraging for contractors, it does emphasise potential issues end-clients face in both the private and public sectors when considering whether off-payroll working rules (IR35) apply. End-clients need to hold sufficient information and be aware of the importance of establishing a full picture of a freelance contractor’s business and clients to be satisfied that they are in business on their own account.
Corecom’s IR35 Connect service, in collaboration with Kingsbridge, is a comprehensive compliance solution for businesses hiring contractors that insures against tax liability, reduces contractor management and administration, and limits the strain of contractor cash flow.
For all IR35-related queries, speak to Corecom’s Director Rick Hughes – [email protected]
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