Kaye Adams IR35 case: five takeaways to keep the off-payroll rules from biting contractors
It came as no surprise that HMRC appealed the decision of the First-Tier Tribunal in Athol House Productions Ltd, also known as the Kaye Adams case, and similarly foreseen, much of the grounds of appeal focussed on it being a “perverse” judgment relating to ‘Control’, writes David Harmer, associate director of contractor solutions at Markel UK.
While the Upper Tier Tribunal did find favour with HMRC’s submission that the FTT did not follow the correct approach; in remaking the decision, the UT held that HMRC’s overall appeal should be dismissed, and has now found in favour of broadcaster Ms Adams, determining her outside IR35.
The tribunal went to great lengths to examine and explain what should be considered when forming a hypothetical contract for the purposes of IR35, and drew a clear distinction from the Autoclenz decision which dealt with a direct engagement.
It was made clear that written contracts must always be given substantial weight as they form the factual basis of the legal agreement between the parties, but the parties conduct (day-to-day working arrangements) are “circumstances” which form part of that contract and may impart additional or subsequent terms and conditions.
Adams was on a standard contract
In this case, it was accepted that a standard contract was utilised by the BBC in respect of this engagement. That contract did impose rights and obligations on the parties that could not be disposed of, but it did not address the entire relationship.
In forming its decision, the tribunal held that sufficient Control, Mutuality and Personal Service existed in the written terms to demonstrate employment. This, however, in the tribunal’s view was not the end of the matter.
The in-business test came into its own
Instead, the tribunal focussed on the third test of McKenna J from the Ready Mixed Concrete case of 1968, being “The other provisions of the contract are consistent with its being a contract of service”.
In applying this test (often dubbed the ‘in business on your own account’ test) the tribunal gave clear direction as to how this should be applied:
“The task is not simply to accumulate impressions and test them against a pre-conceived notion of what constitutes employment. Rather, the task is to consider….whether the taxpayer’s status as a person carrying on business on his or her own account is sufficient to displace the prima facie evaluative conclusion reached following the first two stages”
Following this approach the UT found favour with the FTT’s conclusions. They placed great emphasis on the lack of stability and economic dependence of the hypothetical contract by drawing on Ms Adams prior and concurrent engagements; concluding that she entered into the contract with the BBC as an independent business.
Five takeaways for contractors from the Adams case
Given that this is likely to be the last IR35 judgment handed down prior to the introduction of new off-payroll legislation in April, is there anything of significance we can learn from this decision?
1. Ready Mixed Concrete is king
It is quite apt that within weeks of the biggest ever change to IR35, the tribunals have re-affirmed the principles of the late 1960s Ready Mixed Concrete case. This serves to emphasise that the Intermediaries legislation remains the same.
2. The fundamentals are fundamental
There must be ‘Control’ along with ‘Personal Service’ and ‘Mutuality’ for a contract of employment to exist. Only after those factors have been determined are ‘in-business’ factors considered.
3. Working practices form part of the contract
Working practices (the day-to-day activities) form part of the whole hypothetical contract, one cannot simply look at contracts alone.
4. Contracts must always be fully considered
Equally, written contracts cannot simply be set aside -- they provide inherent right and obligations to the parties. Even where working practices differ from the written terms, they cannot override inherent rights granted by the contracts.
5. In-business factors can tip the scale
It should be pointed out that in-business factors (also referred to as ‘badges’ of business) are not just confined to the specific engagement under enquiry. All business factors of the contractor are relevant to the overall position in respect of IR35.
A very timely reminder, even with its limited application
What is of most significance in the Kaye Adams case is that even where the key ingredients for employment were present, the in-business factors swayed the tribunal away from the initially concluded position of employment.
While this case is of significance, perhaps a word of caution should be aired. The applicability of this decision to industries outside of Media/Entertainment is likely to be limited. As a result, we would certainly not advise contractors, or end-client businesses, to determine their position on IR35 solely on in-business factors. Conversely, this case highlights that had there been a lack of Control, Personal Service or Mutuality of Obligations, then the pre-requisite of employment would not have been present.
Finally, the Adams case should also serve as a reminder to engagers -- and contractors -- that written contracts must reflect the true nature of the day-to-day working arrangements. It is vital that contracts are scrutinised and amended where necessary to ensure they are applicable to the services provided by the contractor in question; a boilerplate approach is for the birds.