What the IR35 assault on the BBC really means
It may be confined in its implications to the TV sector, but the taxman’s ruling that two BBC presenters are inside IR35 speaks to IT contractors about the potential perils of switching from contracting to PAYE, writes Andy Vessey, senior tax consultant at Qdos Contractor.
But more than this potential ‘red flag’-- HMRC clearly saw the presenters’ move to ditch their PSCs and operate PAYE from 2014 as a chance to probe whether they were any changes in their working practices, the judgement is a sign of things to come.
Out with the piecemeal, in with the corporate
In fact, quite soon, no longer will HMRC have to plod along in its piecemeal approach of individually identifying and then singularly investigating each PSC in the public sector suspected of breaching IR35. This is because as things stand, from 6th April 2017, HMRC’s line of attack for IR35 will switch from the contractor to the agency or public sector body engaging the worker. In short, HMRC will be attacking IR35 via big corporate bodies, instead of much harder to see individual contractors.
This change will effectively make HMRC’s ‘aggregated’ pooling of IR35 targets, like we are seeing with the BBC case, far, far easier. It is likely that public sector bodies engaging relatively large numbers of contractors will only use a small panel of agencies, which will make HMRC’s life immeasurably easier compared to the current system of opening individual enquiries into each PSC. Moreover, where they are successful in an IR35 enquiry, HMRC will then have the added bonus of the tax and NI liabilities resting with just one party.
New IR35 case law looms
Fortunately for those public PSCs potentially on the receiving end of IR35 enquiries, once the First-tier Tribunal (FTT) hands down their ruling on the IR35 status of the two BBC presenters, there may well be some useful pointers that contractors can potentially use in any defence that they have to make against the Intermediaries legislation (IR35).
And as we have not had an IR35 tribunal hearing for five years, it will be very interesting if the judge takes a different approach to interpreting evidence in relation to the status tests.
As hinted at this piece’s outset, for PSC contractors involved in broadcasting or who are front of camera presenters, the judge’s ruling will have significant ramifications, particularly where their circumstances are similar or identical. In other words, it’s not just BBC presenters who will be watching the FTT’s lips with interest; it will those working for Sky too, as we know that HMRC is also investigating a number of the channel’s presenters. It should be noted, however, that FTT rulings do not set legal precedent.
HMRC Vs BBC (and other corporate bodies)
But this fact will not faze HMRC too much. The Revenue clearly views the 100 or so BBC presenters in its IR35 net as ‘soft’ targets. They are all working for one organisation and if HMRC are successful with the two initial presenters in question, they will be very confident of catching the rest. This is the clear advantage of the ‘corporate’ approach to attacking IR35 that will be enshrined for HMRC from April, assuming the proposals go ahead.
Bear in mind; it may be that HMRC intends to use the BBC presenters, not only as an efficiency exercise, but as an example to the public. It has been no secret that the government has been dissatisfied with the yield generated through IR35 enquiries over recent years, and in the IR35 ‘discussion document’ published in July 2015, it was suggested that simply the existence of the legislation deterred the avoidance of £520milllion in tax. Perhaps, this high-profile investigation effort is a way in which to further deter others in the TV & film industry who are operating via PSCs.
And it’s not surprising that HMRC took the approach they did, given the number of enquiries into BBC workers; they are seeking to kill two birds with one stone. But it is the wrong stance to take and harks back to the ‘bad old days’ of IR35 enquiries before HMRC introduced their 'new approach.'
How IR35 is being enforced today
More generally, what we’re seeing when HMRC comes to IR35 today is a regretful practice traceable to just a few status inspectors (two in particular, who we understand to be working out of the Salford IR35 team). The approach of these inspectors was severely criticised by Dr David Williams in the 2006 Special Commissioners case of Lewis t/a MAL Scaffolding. Dr Williams suggested that, in effect, HMRC had handled the status enquiry in a less than objective manner. They wanted to establish an employer-employee relationship for their own purposes and then went out to justify a conclusion they sought.
As to what we don’t see, it’s HMRC running with generic evidence. In fact, of all the IR35 enquiries I have been involved in during recent years, each time, where it has been necessary, the IR35 inspectors have sought to establish details about the working practices from the person with the day-to-day knowledge of the contractor’s working arrangements.
We also don’t see that switching from PSC contracting to PAYE is generally perilous – as long as the working practices while contracting were clearly outside IR35. What is clear from the BBC case is that HMRC no doubt saw the change from PSC to PAYE as an opportunity to examine whether there were any major changes in the presenters’ working practices as contractors, compared with their subsequent work as employees.
The more common transfer we see is when employees switch to contracting within the same organisation, but the comparisons are ultimately the same. And who knows if this is about to reverse, so that the common transfer actually becomes ‘PSC to PAYE’ (rather than PAYE to PSC); the very switch that caught HMRC’s attention with the two BBC presenters. Optimistic contractors will point out that, under the April regime, they will be relinquished of the IR35 responsibility, yet we have already seen reports of government departments, such as the UK Hydrographic Office, giving PSCs an ultimatum to join the payroll or terminate their contract. Is this how corporate bodies -- the incoming liable parties for IR35 -- are going to react? Agencies and engagers may well like the look of these ultimatums, but they risk leaving the public sector bereft of either niche skills or much-needed morale. Given that HMRC have begun their enquiries after two BBC presenters transferred to permanent employment, it is understandable that many contractors will be more sceptical than ever of making the same transition.