IR35: Court of Appeal radio presenter decisions – are you tuned in to the implications?

The Court of Appeal (CA) handed down its decisions in the Atholl House Productions Ltd (Atholl House) and Kickabout Productions Ltd (Kickabout) appeals on 26 April 2022. These concerned the Off-Payroll Working (OPW) or ‘IR35’ rules, which can apply where workers’ services are provided through personal service companies or other intermediaries (collectively PSCs). The CA made important points on how the relevant case law tests should be applied when determining the OPW status of a contractor’s engagement. Those engaging contractors should therefore reflect on the potential impact on their tax status determination and dispute procedures, particularly as HMRC’s ‘light touch’ enforcement of the April 2021 changes requiring medium/large private sector organisations (as opposed to the PSC) to account for PAYE/NIC where the rules bite has now ended. This article reviews some key considerations.

Broadly, determining whether an engagement is within the scope of the OPW rules is a three-stage process.

Firstly, it’s necessary to consider the manner in which the worker’s services are provided to the client, including the contractual arrangements between the PSC and the end client.

Secondly, establish what terms the worker and the end client would have agreed under a hypothetical contract if the worker had been engaged to provide those services directly.

Thirdly, apply the established case law tests to determine whether the hypothetical contract would be one of employment or self-employment. These tests centre around personal service/mutuality of obligation (MOO), control and various other relevant factors.

Where the contract would be one of employment then the OPW rules will bite and PAYE/NIC will need to be accounted for accordingly.

What was the outcome of the appeals?

HMRC were successful in both cases.

In Atholl House, the radio presenter Kaye Adams provided her services to BBC Scotland through a PSC. The Upper Tribunal (UT) had held that MOO and the requisite control were present to suggest employment, but that other factors, notably that she had operated as a freelancer in relation to other work over a number of years outside of her BBC work, pointed away from employment. Accordingly, the OPW rules did not apply.

However, upholding HMRC’s appeal, the CA found that when determining whether the hypothetical contract between Ms Adams and BBC Scotland would be one of employment, the UT had given undue emphasis to her freelance career and insufficient weight to the specific terms of the hypothetical contract with BBC Scotland. The case will now be remitted to the UT (or possibly the First-tier Tribunal (FTT)) to determine afresh whether Ms Adams would have been an employee had she been engaged directly by BBC Scotland.

The CA dismissed the taxpayer’s appeal in Kickabout, holding that the hypothetical contract between Paul Hawksbee and Talksport Radio provided for MOO (in particular, that Talksport Radio was obliged to offer him the number of programmes that he was required to present), that there was a framework of control and that there were no other factors which suggested the UT had incorrectly applied the multi-factorial (third stage) assessment.

Why do these decisions matter?

In our view, the following key points emerge from the CA’s judgments.

1) MOO and control are necessary but not sufficient conditions for employment

In Atholl House, HMRC argued based on the UT’s decision in Weight Watchers (UK) Ltd that once MOO and the requisite degree of control were established there is a presumption of employment. The CA rejected this argument, holding that MOO and control alone do not create a presumption of employment and that it’s necessary to consider whether or not other relevant factors support an underlying employment relationship.

2) Other factors can go beyond the express/implied terms of the hypothetical contract

The CA rejected HMRC’s argument that, when performing the multi-factorial third stage assessment, the correct approach is to ignore any factors beyond the express or implied terms of the hypothetical contract. In particular, the CA held that if a person is known to carry on a business on their own account as a self-employed person outside of the engagement being considered, then it would be ‘myopic’ to ignore it. That said, the weight to be attached to this is a matter for the decision-making court or tribunal, based on the evidence presented.

3) Contractual terms are key unless they are ‘unrealistic’

In Autoclenz, the Supreme Court held that when establishing whether individuals are entitled to employment rights as ‘limb (b) workers’ it may be appropriate to disregard written terms that don’t reflect the true agreement between the parties. In the more recent Uber case the Supreme Court elaborated on why this is, in particular explaining that in an employment law context it is key to appreciate the underlying purpose of the legislation is affording protection to those who may well not have bargaining power equal to that of the organisation engaging them. Accordingly, the analysis becomes one of statutory interpretation rather than being hidebound by the terms of a contract.

However, in Atholl House the CA explained that there is no similar underlying statutory purpose or ‘special meaning’ to be applied to the word ‘employee’ in a tax context. In these circumstances the focus should then be on the contractual terms and the UT (overruling the FTT) was therefore correct not to depart from them unless they were ‘unrealistic’. Accordingly, the CA agreed with the UT that, where BBC Scotland had first call on Ms Adams services and could control some of her outside activities, this could not be ignored simply because BBC Scotland had not had cause to exercise its rights in practice.

4) Determining employment status for OPW purposes can be difficult

It might seem obvious, but these cases demonstrate once again that arriving at a conclusion on employment status for OPW purposes can be difficult.

This is illustrated, in particular, in Atholl House where the CA held that the UT had misapplied the third stage multi-factorial test so that the UT (or possibly the FTT) will now need to perform the test again, taking on board the CA’s guidance on how to do so.

This said, it is nevertheless important for organisations that in arriving at status determinations and in managing any disputes, they can demonstrate that they have taken reasonable care in so doing. In these circumstances they will have discharged their obligations even if ultimately HMRC were to take a different view.    

What should organisations do in response to these decisions?

Organisations that engage contractors should ensure that the key principles of the CA’s decisions are considered carefully and reflected in their approach to OPW status determinations and disputes, as well as in supporting internal training programmes.

This will help demonstrate that ‘reasonable care’ is taken when arriving at status determinations and handling disputes. This is particularly important as HMRC’s compliance activities have a specific focus on determinations and dispute processes and HMRC’s ‘light touch’ approach to enforcement ended on 5 April 2022.

In practical terms, individuals who are responsible for status determinations and managing status disputes with contractors should consider the following key points in light of the Atholl House and Kickabout CA decisions:

• If there are ongoing disputes with HMRC on OPW matters, is your position on status based on an approach that the CA rejected?

If so, it could be appropriate to reframe discussions accordingly.

• Do your status determination and dispute processes appropriately consider factors beyond MOO and control?

If not, what needs to be done to bring your approach into line with the CA’s decisions? What do you need to do to ensure that any necessary changes are understood internally and across the labour supply chain? How does your internal training need to change to capture this?

• Do you undertake a sufficiently broad review of all relevant factors?

How do you identify all relevant factors – including those outside the specific hypothetical contract such as whether the worker is established in business on their own account? And is your approach supportable? Is the evidence you hold to support your decisions contemporaneous, robust and accessible?

• Can you readily demonstrate that you’re taking ‘reasonable care’?

Many organisations use technology solutions (like KPMG’s suite of OPW toolsopens in a new tab) to assist in the process of producing status determinations, resolving disputes, and capturing/storing relevant information for presentation to HMRC in the event of an enquiry. If you don’t use technology yet, this could be an effective way to manage your compliance risk.

Further points that businesses should consider when assessing their processes and controls for managing OPW risk are set out in our recent Tax Matters Digest article.

For further information please contact:

• Colin Ben-Nathan
  
• Anne-Marie Robinson