In Albatel Limited v HMRC the First Tier Tax Tribunal held that the provision of Lorraine Kelly’s services to ITV through her personal services company did not fall within the IR35 regime as a hypothetical direct contract between Ms. Kelly and ITV would not have amounted to a deemed employment relationship for tax purposes.
In 2000, intermediaries rules, more commonly known as “IR35” were introduced to seek to deal with the practice of individuals (who would have been employees) “avoiding” employee income tax and national insurance contributions by providing their services indirectly via a personal services company (PSC) and paying themselves in dividends (attracting lower rates of tax). The current IR35 law means that, if the individual would be an employee for tax purposes if they contracted directly with the client (i.e. hypothetically ignoring the PSC), the PSC will be treated as the employer of the individual (deemed employment) and will be obliged to account for employee income tax and national insurance. Since April 2017, payments to PSCs by public authorities have been subject to a specific regime and therefore no longer fall within IR35 (see below).
Lorraine Kelly has been providing services to ITV and others on a freelance basis since 1992. This case concerned personal presenting services provided to ITV since 2012 by way of her (and her husband’s) PSC, Albatel Limited (“Albatel”). Although details of Albatel’s tax filings were not discussed in the judgment, in common with other PSCs, alongside its own corporation tax position, Albatel would have been responsible for determining whether IR35 applied to the arrangement with ITV, and to account for applicable income tax and national insurance contributions accordingly.
In 2012, Albatel contracted with ITV to provide Ms. Kelly’s personal services in connection with certain television programmes. HMRC subsequently determined that the IR35 rules applied to the arrangement on the basis that the hypothetical relationship between Ms. Kelly and ITV was that of deemed employment, consequently assessing Albatel for unpaid income tax and national insurance in excess of £1.2 million. Albatel appealed to the Tax Tribunal (“Tribunal”) and argued that the nature and range of Ms. Kelly’s work meant that the hypothetical direct relationship between her and ITV she should be viewed as one of self-employment, and therefore IR35 did not apply.
The Tribunal upheld Albatel’s appeal. On considering the arrangement as a whole, it came to the conclusion that the reality of the hypothetical direct contractual relationship between ITV and Ms. Kelly did not reflect one of employer and employee.
A key determining factor in the Tribunal’s decision was the amount of control that Ms. Kelly exerted under the hypothetical direct arrangement with ITV. Despite the provisions of the contract between ITV and Albatel seeking to give control to ITV over Ms. Kelly’s activities, it was Ms. Kelly who, quite literally, essentially ran the show. For example, Ms. Kelly determined the relevant programmes’ running order, decided which items would be featured, made decisions on the choice of a co-presenter, and was able to carry out other activities without any real restriction from ITV, even where such activities interfered with her ability to carry out her duties for ITV. Additionally, the Tribunal noted that Ms. Kelly carried out a variety of other work while engaged with ITV without any real restriction. The Tribunal therefore drew the conclusion that Ms. Kelly retained control of her work pursuant to the hypothetical contract. Separately, the Tribunal held that Ms. Kelly could not be considered “part and parcel” of ITV. Instead, the Tribunal was of the view that rather than employing a “servant”, ITV was purchasing a product, namely the brand and individual personality of Ms. Kelly. Ms. Kelly was not entitled to benefits or other common hallmarks of employment (e.g. sick pay, training, appraisals). She was also exposed to some “risk” from the arrangement, such as the programme being dropped or her long-term incapacity rendering her unable to perform. All this supported the Tribunal’s conclusion that Albatel was in business “on its own account”. These factors were, in the opinion of the Tribunal, strongly indicative that Ms. Kelly was a self-employed contractor and, taking into account the full picture of the arrangement, the Tribunal was satisfied that this was indeed the case and this was not an arrangement to which IR35 applies.
This case (and others before it: see Crista Ackroyd Media Ltd v HMRC, MDCM Ltd v HMRC; Jensal Software Ltd v HMRC) reminds us that IR35 and “employment status” continues to be an area of particular focus for HMRC, although it has seen limited success at tribunal in recent times (see Christa Ackroyd Media Limited, which has been reported as being subject to appeal in the Upper Tribunal). It also highlights how difficult it can be to determine employment status for tax purposes for a given factual scenario, notwithstanding HMRC’s continued improvements to its online “Check Employment Status for Tax” (CEST) tool.
The decision comes at a time when businesses and contractors operating in the private sector are anticipating radical reforms to IR35 from April 2020. Subject to an exception for “small” businesses (to which the current IR35 rules should continue to apply), the proposed reforms will shift liability for determining whether there is a deemed employment relationship (and therefore for accounting/deducting for applicable income tax and national insurance) from the PSC to the ‘client’ business (or, if different, the fee payer). Although detailed legislation is due to be released later this year, similar “off-payroll working” measures have been in place in the public sector since April 2017, so the general scope of the regime is now generally well-known. Taking the arrangements in Albatel as an example, from April 2020 it would generally be ITV (and not Albatel) saddled with the potential tax liability and HMRC litigation, should a deemed employment relationship exist. Clearly this is an area that presents potential for reputational as well as financial risk for businesses engaging PSCs.
In light of HMRC’s apparent appetite for challenging taxpayers on employment status and IR35, this litigation is likely to be viewed as a “warning signal” by client businesses and other labour-chain intermediaries to ensure that they are both complying with current rules and are adequately preparing for April 2020. Sectors in which it is common to engage PSC contractors, such as the IT, technology and media industries are likely to be particularly affected. Managing and implementing change in larger organisations is sometimes likened to turning an enormous tanker on the high seas. With that in mind, businesses that rely heavily on contracted-out services through PSCs (or other forms of intermediary) would be wise to spend the coming months undertaking a comprehensive review of current arrangements and putting in place relevant procedures to deal with the expected new rules.
It is worth reiterating that Albatel was concerned with deemed employment status for tax purposes, and not for employment law purposes. Although the tests are similar, it is not inevitable, particularly where a PSC is involved, that a deemed employee for tax purposes will be an employee for employment law purposes.