IR35 refers to the legislation which seeks to prevent the avoidance of income tax and NICs through the use of a personal service company and other intermediaries (PSC). If IR35 applies, the PSC is liable to pay income tax and NICs in respect of the deemed earnings under the arrangements. Broadly, IR35 applies where an individual provides personal services for a client through a PSC, and if the arrangements had been made directly between the individual and the client, they would have been regarded as an employee of the client.
This case related to tax years when Atholl House was the PSC of Kaye Adams who performed services for the BBC (for BBC Scotland) and other media organisations, which included appearing on ITV’s Loose Women and writing for various newspapers and magazines. The issue was whether, if the services supplied by Ms Adams to the BBC had been supplied under contracts directly between her and the BBC, she would have been regarded as an employee for income tax and NICs purposes, in which case the IR35 rules applied.
The Upper Tribunal decided that while mutuality of obligation and the requisite control were present to suggest employment, other factors, notably that Ms Adams worked as a freelancer to organisations other than the BBC over a number of years, pointed away from employment – and accordingly, IR35 did not apply.
The Court of Appeal found that when determining whether the hypothetical contract between Ms Adams and BBC Scotland would be one of employment, the Tribunal had placed undue emphasis on her freelance career and hadn’t put sufficient weight on the specific terms of the hypothetical contract with BBC Scotland. Rejecting the argument that there is a presumption of employment once mutuality of obligation and the requisite degree of control are established, the Court held that it’s necessary to consider whether or not there are other relevant factors supporting an underlying employment relationship.
The case will now be sent back to the Tribunal to be determined afresh.
Key Action Points for Human Resources and In-house Counsel
This is the first time the Court of Appeal has dealt with appeals concerning the application of IR35.
It is important for businesses to show that they have taken reasonable care in arriving at IR35 status determinations, so that they have discharged their obligations even if HMRC ultimately take a different view.