We have seen a stream of cases on the application of the IR35 tax rules and the latest one, just reported, again highlights the complexity of the test for determining employment status for tax purposes. It adds to the confusion and increases the difficulties for businesses faced with judging whether contractors should be taxed as employees or not.
This is the Court of Appeal’s ruling in the case of broadcaster Kaye Adams in the long running litigation against HMRC concerning her production company Atholl House Productions. The Court of Appeal has re-confirmed that determining whether an individual is an employee for tax purposes under IR35 is a “multi-factorial” test and it is important to look at all the information “reasonably available to both parties” when making a decision. Although the court ruled in favour of HMRC, which was appealing an earlier ruling that Adams was not an employee under the IR35 rules, it declined to rule as to whether Adams was an employee for tax purposes under IR35. Instead, its ruling focused on whether the tribunal’s decision had been reached on the correct basis and that’s what’s important about this case. The Court of Appeal says that tribunal got it wrong – they didn’t apply the employment status test correctly. The case will now be re-heard by the tribunal to determine Adams’ employment tax status.
Tax specialist Penny Simmons comments on this for Outlaw in ‘Latest IR35 case highlights employment status ‘complexities’ for UK businesses’. She says: ‘Although this decision may be welcomed by individual contractors, it is unlikely to be seen as a positive development by businesses who are now responsible for making status determinations when engaging contractors through personal service companies.’
Penny said much the same thing to this programme about the Adrian Chiles case a few weeks ago – Chiles won his case and was ruled to fall outside IR35. So why is this case, involving Kaye Adams, any different to that one? It’s a question I put to Penny:
Penny Simmons: “What the Court of Appeal has said, and they've really stressed this point, is that in order to work out, or determine whether an individual is an employee for tax purposes the business has to look at not just the arrangements between the business and the individual contractor, but to look at other arrangements that might be relevant in terms of how that individual runs their own, if you like, freelance business and that is interesting because that's quite complex for a business, when they're making a status determination, to obtain that information as about the individual's wider business arrangements. How does a business go about getting that information? How does a business go about getting that information when they engage the individual contractor through an agency, so then they have to go through an agency to the individual contractor, and that is adding a significant extra layer of complexity for a business when making status determinations for IR35 purposes.”
Joe Glavina: “The Revenue has said it will stand by the results of their CEST tool, Penny. So why don’t employer’s simply use CEST and, if the individual falls outside IR35 they hire them, otherwise they don’t hire them?”
Penny Simmons: “So, theoretically, that would reduce the risk dramatically, because yes, as you say, the Revenue has said they will stand by the results of the CEST determination if the information put into that self-determination is true and accurate. I think the problem that large businesses, particularly, face is that, again, it comes down to this idea that running those determinations is a compliance process and if you've got a large business and you're possibly trying to run determinations, either through HR or through your procurement team, but you've got multiple divisions, so you've got multiple sets of people who might be trying to run these determinations, you have to how do you control? How do you manage the different parts of the organisation. Are they running the CEST tool, or operating the CEST tool, correctly? They know how to put the information into CEST, they know how to collect the information, they know how to make sure they've got enough information from the contractor or from the agency that they're working with, and that is very complex and very difficult for a large business that is trying to manage its risk appropriately and effectively. So large organisations are simply going to say this is too complex this is this is we cannot manage our risk effectively by even engaging PSCs at all by using the CEST tool, so the simplest way for us to manage risk is simply to say, we're not going to engage with individuals through personal service companies, because then we don't have to make the status determinations and we don't have to run the risk whether they run through CEST or not, we don't have to run the risk of getting it wrong and exposing ourselves.”
If you want to know more about how the Court of Appeal arrived at its decision in the Kaye Adams case you can. Penny article is called in ‘Latest IR35 case highlights employment status ‘complexities’ for UK businesses’ and is available from the Outlaw website.
- Link to Court of Appeal judgment: HMRC v Atholl House Productions Limited