A tax tribunal has dismissed an IR35 appeal by a former Scottish TV pundit and his company. The case illustrates once again the complexity of the IR35 tax rules and the general level of uncertainty inherent in making IR35 status determinations. We’ll look at why that is.
The Daily Record and Scottish Financial News reports on this. Neil McCann is a former Scottish footballer who now works in the media through his personal service company McCann Media Ltd. He has lost his IR35 appeal at First-Tier Tribunal against HMRC for services provided to broadcaster Sky for tax years spanning eight years. The Revenue had taken the view that McCann’s relationship with Sky fell inside IR35, and the tax tribunal has ruled they were right. McCann now faces a substantial tax bill.
A reminder. 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' NICs for contractors falling within the scope of the rules.
Looking at the judgment, there were three main reasons why the tribunal found McCann’s contract with Sky to be one of employment, inside IR35:
1. The contracts between McCann’s personal service company and Sky largely reflected the agreement between the two parties, despite the 6-week stint that McCann had as interim manager of Dundee football club.
2. Sky had final editorial control over any products that contained McCann’s contributions.
3. Whilst there was no absolute right for Sky to determine the dates on which McCann was to attend and act as a pundit, nevertheless, this did not negate the right level of mutuality of obligations. Sky still had a sufficiently high level of control over McCann that meant the relationship between them was one of employment.
So, in summary a lack of strong mutuality of obligation and a lack of control were central to the tribunal’s finding in favour of the Revenue.
That ruling contrasts sharply with the recent case of presenter Adrian Chiles who, unlike McCann, was found to be in business on his own account, albeit after successfully appealing the First-tier Tax Tribunal’s s decision. Unlike McCann, Chiles was found to be outside IR35. Back in February, tax lawyer Penny Simmons wrote about that case for Outlaw highlighting the complexity of the IR35 rules and the uncertainty employers face when it comes to making status determinations. So, let’s pick up on that. Penny joined me by video-link to help explain why the Adrian Chiles case fell outside IR35, unlike McCann, and why the rules are complex:
Penny Simmons: “The reason I talk about these rules being complex is I am talking about the rules for working out whether somebody is an employee for tax purposes, which sits within the IR35 rules, and the reason why these rules are complicated is that there is no specific definition of employment status for tax purposes. You have to look at a series of factors and you have to look at all the circumstances of the case to work out whether somebody is or isn't an employee for tax purposes. Now, we know that the Revenue usually will look at a few factors, three main factors, and they will place particular weight on those factors, those factors being: Is there mutuality of obligation? What level of control did the business have over the individual? Also, personal service and whether the individual could provide a substitute. Previously, you'd look at it and say, well, if those three factors were present then, in all likelihood, that person would be an employee for tax purposes but what's happened in the Adrian Chiles case is the tribunal has said, okay, well, yes, those factors may be present but let's take a step back and look at all the facts and circumstances of the case and say, was Adrian Chiles in business on his own account and, if he was, then notwithstanding control, mutuality of obligation and personal service, we're going to say that he was not an employee for tax purposes and therefore the IR35 rules didn't apply and that is what has happened here and that is what makes this case so interesting. That's what highlights why these rules are notoriously complex and that also is what makes it even harder for businesses when trying to work out whether individuals engaged through PSCs would be employees for tax purposes.”
Joe Glavina: You say in your Outlaw article that this decision will not be helpful to business trying to apply the rules and manage IR35 tax risks because, essentially, it creates a lot of uncertainty. So, what can employers do about it? What’s the fix?”
Penny Simmons: “That's a great question, what is the fix? Not to be unhelpful, I'm not sure there is an absolute fix at the moment. It will be interesting to see what happens with the Adrian Chiles case and whether the Revenue goes on to appeal it. I think the message to business has to be to take the status determinations that you make under IR35 when engaging individuals through PSCs, to take those determinations seriously and to look at all the facts of the case and not to make sweeping decisions based on one factor alone because, really, what we can see you need to stand back and you need to look at all the circumstances that are going to affect how that individual is engaged by the business and how they provide services to the business. Now that's not a perfect answer, a perfect solution, to business but at the moment I think that's the best we’ve got.”
Joe Glavina: “Given it’s very complex, should employers be getting expert advice to help get it right. So, someone like you would help decide?”
Penny Simmons: “Again, we have to look at practice pragmatic solution as well as minimising risk as far as possible. Now, obviously, I can make those reviews and I can look at the status of terminations for clients but sometimes it will be impractical to get a lawyer, or another advisor, to review everything, every single status determination that's made. What my advice to businesses would be where it's grey is definitely seek advice or take a step back and think about it. Think about it carefully, because it can be grey, and you do need to often think about it very carefully and look at all the facts and circumstances of the case.”
Penny’s article on the Adrian Chiles case which we mentioned earlier is called ‘IR35 win for Adrian Chiles shows complexity of UK rules’ and is available now from the Outlaw website.