Out-Law News 2 min. read

Latest IR35 case highlights employment status ‘complexities’ for UK businesses

The latest decision by the English Court of Appeal on the application of the IR35 tax rules highlights the complexity of the test for determining employment status for tax purposes, a tax expert has said.

Penny Simmons of Pinsent Masons said that the Court of Appeal’s decision in broadcaster Kaye Adams’ long-standing case against HM Revenue & Customs (HMRC) is likely to increase the difficulties for businesses when determining whether contractors should be taxed as employees.

The Court of Appeal 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.

Simmons said: “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 (PSCs)”.

“The need to look at all the information ‘reasonably available’ and not just at the facts regarding the nature of the contractor’s specific engagement with the business is particularly onerous. It may be difficult for a business to assess whether it has collected sufficient information about how the contractor carries on its business and this issue may be compounded when the contractor is engaged indirectly through an agency,” she said.

The court confirmed that ‘mutuality of obligation’ between the parties and the right of control are necessary for there to be an employment relationship. Once established, all other relevant factors need to be considered before a determination can be made.

Simmons Penny

Penny Simmons

Legal Director

The more complex the test, the greater the compliance burden on business when applying the rules

Although the court ruled in favour of HMRC, which was appealing the Upper Tribunal’s decision 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. In determining that the Upper Tribunal had not applied the employment status test correctly, the Court of Appeal held that the case should be re-heard by the tribunal to determine Adams’ employment tax status.

The IR35 rules require that employment taxes be paid by people who provide services to a business through a PSC or other intermediary if that person would otherwise have been regarded as an employee for tax purposes of the engaging business. From 6 April 2021, engaging businesses became liable for determining whether the IR35 rules apply, operating PAYE and paying employers' National Insurance contributions for contractors falling within the scope of the rules. Previously, where a private sector business engaged a contractor through a PSC, liability to decide whether IR35 applied and to pay any employment taxes rested with the PSC.

Simmons said that it was “interesting that the court appeared to indicate that the IR35 employment status test may be overly complex, noting that it would be ‘desirable if, there were one clear test or approach to determining whether a person was an employee’”.

“It is hoped that this decision may provide further impetus for the government to review the employment tax status test and introduce a replacement that is easier for businesses and contractors to understand and apply with certainty,” she said. “The more complex the test, the greater the compliance burden on business when applying the rules. This increasing compliance burden, coupled with the tax risks for a business if they make an incorrect IR35 status determination, may result in more businesses refusing to engage with contractors through PSCs, which may exacerbate existing challenges across labour supply chains.”

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