Other news in brief

In a decision that was widely expected, the Court of Appeal (CoA) has upheld the Upper Tribunal’s decision in the JTI Acquisition Company case which we discussed in an earlier article. That decision was interesting in that it stated that the statutory language, which simply asks about the purposes ‘for which’ a company is party to a loan, is not restricted to the purposes of the company itself and if the answer is that a particular company was chosen for a tax reason, this may be indicative of an unallowable purpose. The CoA has confirmed that while “a company’s purposes in being a party to a loan relationship cannot necessarily be equated with the purposes for which it exists or those of a wider scheme” the latter are not always irrelevant. This adds to a growing body of case law dismissing the old argument that purpose should be viewed solely from the perspective of the Directors of the borrowing entity, or the opposite argument that purpose should always consider the wider scheme and why the borrowing entity was created. Instead the factors that should be considered to determine purpose will vary depending on the specific facts of each case. From a practical perspective this means that whenever there is a UK borrower in an acquisition structure a clear and detailed assessment of the commercial and business reasons for the UK borrowing entity’s involvement should be carried out, supported by contemporaneous documents.

The Upper Tribunal (UT) has allowed HMRC’s appeal in Basic Broadcasting Ltd, remitting the case to the First-tier Tribunal (FTT) for reconsideration. Broadly, determining whether an engagement is within the ‘IR35’ (or Off-Payroll Working, OPW) rules is a three stage process: (1) establish how the worker’s services are provided – including the contractual arrangements between their intermediary (usually a Personal Service Company) and end-client; (2) determine the hypothetical contract that would have existed had the worker and end-client engaged directly; and (3) apply the employment status for tax case law tests, which concern mutuality of obligation, control, and whether other relevant factors are consistent with a contract of service (employment) or a contract for service (self-employment). Allowing HMRC’s appeal, the UT held that the FTT had applied the case law test concerning other relevant factors incorrectly. In summary, the FTT had considered the relationship between the hypothetical contracts and Mr Chiles’ other professional activities, when it should have examined the terms of the hypothetical contracts in the context of those other activities. Additionally, the FTT had not correctly limited the facts and circumstances it considered to those that were known by, or reasonably available to, both parties at the time the hypothetical contract was made. In reaching its decision, the UT applied the Court of Appeal’s clarification in Atholl House (the Kaye Adams case) of how the relevant case law tests should be applied. The CoA decision in Atholl House was handed down after the FTT delivered its original judgment in this case and, following Atholl House, HMRC’s win is unsurprising. However, this case demonstrates the challenge that contractors and end-clients – and indeed the Courts and Tribunals – face when applying case law that the UT described as ‘in a state of flux’ and ‘a moving target’ when determining an engagement’s ‘IR35’/OPW status. In this regard, we note that the Supreme Court’s decision in Professional Game Match Officials Ltd, which has the potential to develop how the mutuality of obligation test is applied, is still awaited.