HMRC has recently lost two high-profile cases in the tax tribunal in relation to IR35 legislation. Lorraine Kelly and Kaye Adams (of Loose Women fame) both succeeded in challenging the assertion by HMRC that IR35 legislation applied, significant defeats for HMRC in cases which it would, presumably, have felt confident of winning.
What is IR35?
IR35 legislation states that where an individual provides his or her services to a client via a limited company, if the relationship between individual and the client would – but for the presence of the limited company – be one of employment, the limited company is liable for tax and social security contributions on earnings for the provision of services, as though it were the employer of the individual.
Consequently, the limited company must pay employer’s national insurance and deduct income tax and employee’s NI via the PAYE system on the entirety of the individual’s earnings from the provision of the services. Typically, individuals who supply their services in this manner will pay themselves from their company a level of salary, on which employer’s national insurance is paid. However, with significant amounts paid via dividends on which lower tax rates and no national insurance contributions arise, using the limited company structure does result in savings to the individual.
From 2020, it is proposed that the obligation to apply the IR35 regime, and so deduct tax and national insurance from payments to limited companies falling within IR35, will be placed on the client, a significant change for business using the services of individuals who trade in this way.
When does IR35 apply?
The difficulty HMRC has encountered is that there is no single or absolute test of when a relationship is one of employment rather than genuine self-employment. Each case turns very much on its own facts. IR35 applies if the hypothetical direct relationship between the individual and the end user is one of employment and not genuine self-employment. In the Kelly and Adams cases, these individuals and their limited companies were assessed for tax by HMRC on the basis that they fell within IR35. They each challenged this finding and the Tax Tribunal upheld their contention that they were genuinely self-employed.
In the Adams case, the judge noted that she had a 20-year career as a freelancer and the fact she had a number of roles outside the BBC, her main client, showed that she was in business on her own account, as did the fact that she was not entitled to holiday, sick pay, maternity leave or a pension entitlement from the BBC, provisions which would have been consistent with employment status. In the Kelly case, her high level of expertise and experience meant, in the view of the tribunal, that she was not subject to the supervision or control of the BBC with whom she also contracted, and so could not be regarded as an employee.
HMRC, in its consultation paper on the proposed new legislation, has indicated that it believes the assessment of self employed or employed status is straightforward. The number of cases before the tribunals in recent years dealing with correct employment status – for example Pimlico Plumbers, Uber, Addison Lee, and the Revenue’s defeats in the Tax Tribunals – indicate this is very clearly not so.
However, the practical risk for individuals who supply their services through companies is that HMRC will in future require clients to make the assessment, and not all have the will or resources to risk any challenge from HMRC. The forthcoming changes may lead some clients to ’play safe’ and opt for deduction of tax and social security contributions from payments made under such contracts. Consequently, HMRC may yet achieve its goal of increasing tax revenues, despite the high level of uncertainty in the law.
Yvonne Gallagher is an employment law partner at Harbottle & Lewis