Stranger than fiction: the fact-sensitive nature of IR35

It is less than 12 months until the rules reforming IR35 come into force for the private sector.

The off-payroll working rules apply where contractors supply their services via a personal service company (PSC) to a business.  Under the new rules, liability for tax will no longer sit with the PSC but will be shifted to the business. 

Government consultation on off-payroll working rules

The government has issued a consultation and policy paper on the operation of the new rules.  This helpfully confirms a number of aspects of the new regime, such as the exclusion of small companies and the process of accounting for tax, NICs and the apprenticeship levy where contractors have deemed employment status.

It also confirms that private sector businesses must give contractors a “status determination”.  This means that businesses must determine whether a contractor is genuinely self-employed or whether, absent the PSC, the contractor would be an employee. 

Perhaps it’s no more than the turn of phrase, but this requirement throws into sharp relief the thorny nature of the task that businesses are being asked to undertake.  As countless employment and tax tribunal decisions show, unpicking a contractual arrangement to determine employment status can be a tortuous task.

With impeccable timing, two recent decisions of the First-tier tax Tribunal illustrate this point. 

High profile tax rulings against HMRC

It was reported in March that TV presenter, Lorraine Kelly had successfully demonstrated that she was conducting a legitimate IR35 arrangement via her PSC.  HMRC had been pursuing her for in excess of £1 million worth of unpaid income tax and NICs on the basis that it considered her to be a deemed employee of ITV.  The tax tribunal disagreed with HMRC.  It emphasised the fact specific nature of the test and the danger of drawing parallels with other superficially similar cases.  

In April, broadcaster Kaye Adams also successfully appealed against an HMRC decision regarding her work for the BBC.  HMRC had demanded in excess of £100,000 in unpaid tax and NICs.  The tax tribunal held that she was not a deemed employee.  It looked at the overall nature of Ms Adams’ work both for the BBC and for other broadcasters and held that the correct tax analysis could not be determined by the “slavish application of a checklist”.  Instead it required “consideration of the overall picture”. In other words, it was a fact-sensitive exercise.

The question then arises as to whether in the absence of a checklist, status determination is an exercise which businesses can be fairly asked to undertake. The Adams and Kelly cases show that HMRC, with their specialist expertise dedicated to conducting an assessment, can get it wrong.  So what hope do businesses without such expertise and with other constraints on their time and resources have?

Good Work Plan promised clarity on employment status

In its consultation on the off-payroll working rules, the government outlined its expectations that decisions must be taken properly and consistently but that “blanket decisions” would not be appropriate.  The reality is that for the off-payroll rules to work, checklists and blanket decisions are precisely what businesses do need. 

The government has yet to fulfil its promise to improve the clarity of the employment status tests made in the Good Work Plan (as detailed in our client alert).  Perhaps when it does, this will give businesses the certainty they need.