What Kaye Adams’ IR35 ruling really means for IT contractors
Courts correcting courts on which of them is right on IR35 – a framework which all mid-sized and large organisations are now expected to be able to work out themselves, even as our country’s top judges clash on when it applies, writes Chris Hadrill, partner in the employment law team of Redmans Solicitors.
I’m referring of course to the recent case of HMRC v Atholl House Productions Ltd.
For the uninitiated, a recap or two, or three actually, is required.
According to a judgment published this month, the Court of Appeal has upheld an appeal by HMRC against an Upper Tribunal decision that Kaye Adams, a presenter for the BBC, was not an employee of the BBC. The CoA found that both the initial First-Tier Tribunal and after it, the Upper Tribunal had incorrectly applied the law.
What were the facts of HMRC v Atholl House Productions Limited?
Atholl House Productions Ltd is the personal service company of Ms Adams, a Scottish journalist and broadcaster.
HMRC opened an investigation into the tax affairs of Atholl House and concluded that a number of the contracts that the company had signed with the BBC were caught by IR35. These contracts set out that Ms Adams was not required to work exclusively with the BBC, but she had to fulfil a minimum commitment of 160 programmes and a minimum contract fee, as well as the BBC having the right of first call on her services (subject to Ms Adams’ other commitments).
HMRC concluded that this arrangement meant that Ms Adams should be treated as an employee of the BBC, rather than an independent contractor. As a result, HMRC contended, the payments that Atholl House received from the BBC should be treated as employment income, with tax and national insurance contributions payable on such sums.
Atholl House submitted an appeal against HMRC’s decision to the First-Tier Tribunal.
The decision of the First-Tier Tribunal
The First-Tier Tribunal upheld Atholl House’s appeal, holding that Ms Adams was not an employee of the BBC when the test set out in the Ready Mixed Concrete Ltd case applied.
Crucially, this test set out that a person should be considered an employee where:
1) there was mutuality of obligation between the parties;
2) there was sufficient control; and
3) if the first two criteria were satisfied, there were no other factors to displace the conclusion that the person was an employee.
The First-Tier Tribunal concluded that although there was a mutuality of obligations between Ms Adams and the BBC under the terms of Atholl House’s contracts with the BBC there was some, but not sufficient, control by the BBC over Ms Adams to render her an employee of the organisation.
Further, the FTT also found that the terms of the contracts that Atholl House had agreed with the BBC did not accurately reflect the actual agreement between the parties (as, despite the terms of the contracts, the BBC did not in reality have first call on her services nor had she been required to obtain consent to work with third parties). In addition, under a “hypothetical contract” which comprised the real terms, the agreement was not a contract of employment, but a contract for services.
HMRC appealed to the Upper Tribunal..
The decision of the Upper Tribunal
The Upper Tribunal held that the FTT had erred in its application of the law by failing to apply the normal rules of contractual interpretation set out in the Autoclenz Ltd case. The Upper Tribunal, however, held that despite these errors there was no contract of employment in place between Ms Adams and the BBC as she had entered into the hypothetical contract with the BBC as per of carrying on business on her own account.
HMRC, again, appealed to the Court of Appeal.
Third time’s a charm? The Court of Appeal judgment
HMRC argued that the Upper Tribunal had incorrectly applied the law on Ready Mixed Concrete by applying a ‘business on own account’ test rather than properly analysing the “other factors” which would determine whether or not there was a contract of employment in place (or not). The Court of Appeal therefore remitted the case to the Upper Tribunal.
What does the CoA’s decision mean for contractors?
The key point to take from this case is the emphasis that all three parts of the Ready Made Concrete test need to be made out -- in order for a contract of employment between one party and another. So there needs to be:
- A mutuality of obligation between the parties (i.e. one party paying a wage for services and the other party obliged to provide their own services to undertake the services);
- Sufficient control by one party over the other (i.e. one party deciding how things are done, when they are done, who should do the work etc., with the other party having little to no agency); and
- No other factors to displace the conclusion that the person was an employee.
Here’s why some contractors’ supporters are pleased with the CoA ruling
For contractors, this means that even if your client is paying you for services (and requiring you personally to provide your service), and tightly controlling what you do, this does not necessarily mean that you are by fact, or by law, an employee.
An analysis of all the other factors of the working relationship also need to be taken into account, before a determination can be accurate. This would normally include:
- Whether you’re paid a regular wage (or whether you’re paid a fixed sum for a particular job),
- The processing of the payment (e.g. whether you’re on PAYE or whether you submit invoices for your work),
- The pattern of the engagement, including how regular the work is,
- What form of contract you sign/signed,
- Whether you’re required to wear a uniform, and whether you can work for other businesses or not (among other factors).
A secondary but much more alarming point to be taken from this case is that the law on employment status is wholly confusing -- if not baffling, and massively prone to disagreement.
Consider, if experienced lawyers and judges can’t apply the relevant tests correctly, what hope do businesses and contractors have when working out what the appropriate working relationship is? And of course, that is the exact obligation on non-small companies since the revised off-payroll rules came into force in last year, in April.
Given the increasing prevalence of contractors in the workplace, a case could reasonably be made for the government intervening to set out a statutory framework able to determine the existence and nature of working relationships. Equally, there is also a case to be made for getting some legal advice, even if it is brief advice, on a contract before entering into it.