If you are ever investigated by HMRC and employment status is found between your company and your end customer, then IR35 tax will be payable. This effectively means that PAYE tax and employer’s NI will be payable on the contract value at a much higher rate than corporation tax – and without any company operating expenses being allowable either!
That’s why it’s vital to be aware of the influencing factors that judges have flagged up in the latest IR35 court rulings.
“Employment status is never a matter of choice; it is always dictated by the facts and when the wrong tax is being paid, we put things right.” HMRC
If you would like to double-check your contract, try out this free online IR35 contract review or try HMRC’s CEST tool and if you print out your results then these can be relied upon in a tax enquiry as long as you’ve been truthful with your answers.
This article highlights some of the latest IR35 cases, and uses what we’ve learned from them to draw up a list of the most influential factors. We then provide tips on what to include in a contract for services.
Mr Wells vs HMRC
Mr Wells, an IT Contractor, avoided a £26,000 HMRC claim for unpaid income tax and national insurance contributions. He achieved this by successfully proving he was working under a contract for services – not an employment contract – with DWP for 11 months.
Kaye Adams v HMRC
Celebrity Kaye Adams, the presenter of ITV’s Loose Women, won her IR35 challenge when a First Tier Tribunal (FTT) found that the terms of her contract for BBC radio shows meant she was not an employee, saving her from having to pay £125,000 in PAYE and NI.
Lorraine Kelly v HMRC
Lorraine Kelly won her case as the First Tier Tribunal ruled that IR35 did not apply. They agreed that ITV did not employ Ms Kelly – it was simply buying her brand when it contracted her to present two shows for ITV Breakfast Ltd: Lorraine and Daybreak.
More recently Helen Fospero, another TV presenter who actually covers for Lorraine Kelly, also won her case at first tier tribunal on similar grounds. Read full details of the ruling here.
Paul Hawksbee v HMRC
HMRC lost another high-profile IR35 case when Talksport presenter Paul Hawksbee successfully challenged a tax bill of around £140,000. He won despite the fact that he had co-presented The Hawksbee and Jacobs Show for Talksport since 2000.
Mark Daniels V HMRC
Construction contractor Mark Daniels won his appeal over a contract covering tax years 2012/13 and 2013/14, when he was engaged by Structure Tone Limited (STL) through the agency Solutions. The tribunal ruled that there wasn’t enough evidence to show that Daniels was controlled by STL.
Christa Ackroyd v HMRC
HMRC won this appeal case because employment status was found to exist between Ms Ackroyd and the BBC on the project of presenting Look North. Ms Ackroyd now owes tax and NI of £419,151 for the tax years she worked for the BBC.
IR35 rules: What to to consider
1. Mutuality of obligation (MOO)
In Mr Wells’s case, it was accepted that his contracts with DWP had a low level of MOO as each contract only lasted for a short duration. There were also breaks between contracts, proving there was no contractual obligation for DWP to provide continuous work for Mr Wells.
In the case of HMRC v Ms Adams, Kaye Adams pointed out that she was not paid when she missed shows because of family responsibilities. She had also been suspended for three weeks and received no fees when the BBC decided that a tweet sent from her personal Twitter account breached standards.
In the cases of both Ms Kelly and Mr Hawksbee, the tribunal agreed that MOO existed. However, it amounted only to the ‘irreducible minimum’ and was not determinative of the issue.
Ms Ackroyd, on the other hand, was engaged in a seven-year contract to provide her services for up to 225 days per year with the BBC. According to the ruling, this meant that Ackroyd’s work was pursuant to a highly stable, regular and continuous arrangement, which pointed more towards employment.
Mr Wells’s contract for services included a substitution clause which meant that he could have sent someone else in as a substitute for him on the project. Even though this didn’t happen, the fact that Mr Wells’s contract recognised substitution was strong evidence.
For Mr Daniels, whenever he gave notice that he wouldn’t be on site, STL would call Solutions and request a substitute. The tribunal accepted that Daniels was neither ever asked to provide a substitute himself, nor entitled to do so.
Mr Hawksbee did not have the right to provide a substitute in his work for Talksport, but this was rendered a neutral factor, as “Talksport were contracting for the unique expertise and work product of Mr Hawksbee.”
Ms Ackroyd had a clause in her contract which prohibited her from using a substitute. This wasn’t a deciding factor in her case due to the nature of her work as a presenter – but in a different context it could have swayed the balance.
Mr Wells proved that the control element which he was subject to with DWP, which affected how and where he would work, was substantially less and clearly distinct from that over employees.
Ms Adams told her tribunal that she had ultimate control over which callers to take, what questions to ask and what direction the show should follow, although other members of the team would make suggestions. The BBC certainly had ultimate control over the content of her programmes, but not over how that content was created. As far as Ms Kelly was concerned, the tribunal agreed that control of her work lay with her; ITV’s level of control fell substantially below the degree needed to demonstrate a contract of service.
The tribunal in the Daniels case ruled that there wasn’t sufficient evidence to support HMRC’s claim that Daniels was controlled by STL. Tribunal Judge Ian Hyde acknowledged that STL did not have control over how or where Daniels worked, adding: “STL did not exercise any more control on the site than they would over an independent contractor.”
Mr Hawksbee’s tribunal agreed that while Talksport controlled the ‘where’ and ‘when’ of Hawksbee’s work, this wasn’t strongly indicative of employment, due to the nature of the work. Hawksbee was “afforded an extremely high degree of autonomy by Talksport,” while “editorial and artistic control of the content and format lay almost entirely with Hawksbee.”
In Ms Ackroyd’s case it was found that the BBC ultimately had the right to specify what services she would provide and editorial control over the content. Ackroyd’s contract also restricted her from providing services to other organisations without the BBC’s consent. Control was not mentioned at all in Ms Ackroyd’s contract.
Based on the rulings in these cases, here are our tips on what we think you should include in your contract for services:
Mutuality of obligation – include clauses which make it clear that the client company is not obligated to provide you with continuous work or replacement work, if the project you are working on is abandoned. If possible, opt for shorter-length contracts with breaks in between contracts running in succession.
Substitution – include clauses that clearly state that you can supply a different person to undertake your work if you are absent and it is your responsibility and discretion to choose to cover your absence.
Control – retaining more control over your work than an employee would have is crucial. Include clauses stating that you control factors like timescales, locations, deadlines and how you will utilise your skills.
Exclusivity – avoid signing any clauses which will prohibit you from undertaking any work for other customers while the contract is running.
Financial risk and personal liability – include clauses stating that you have a contractual obligation to remedy any defect in your work at your own time and expense.
Contractual changes – include a term stating that any changes to your role need to be agreed in writing with you first.
Don’t forget if you would like to double-check your contract, try out this free online IR35 contract review or try HMRC’s CEST tool and if you print out your results then these can be relied upon in a tax enquiry as long as you’ve been truthful with your answers.
This blog underlines the importance of maintaining evidence to show your control of your working conditions, as we do in the annual review meetings with our contractor clients. Let us know if you would like to upgrade your service package to include an annual review meeting.