The upper tribunal has decided that an actor must pay secondary class 1 NIC on his earnings although IR35 did not apply. This was a test case for many actors in a similar position.
Big Bad Wolff Ltd was the personal service company of the actor Robert Glenister until April 2011.
While HMRC agreed that the IR35 rules for income tax did not apply as Glenister is unquestionably self-employed as an actor, it argued that the NIC Categorisation Regulations (Cat Regs) did apply and therefore secondary Class 1 NI contributions were due.
The version of the Cat Regs which applied up to 5 April 2014 meant that if any of the payments made to an actor by a producer included ‘salary’ then all payments would be treated as if earned by an ‘employed earner’ – and so subject to secondary Class 1 NICs.
If Glenister had supplied his services directly to a producer, it was accepted by both sides that the Cat Regs would have bitten. The fact that his acting services were supplied by Big Bad Wolff Ltd meant the Cat Regs could not apply directly. But what about indirectly?
Regulation 6(1)(c) of the NIC Intermediaries Regulations (SI 2000/727) examines what would have happened if the service company wasn’t there. If the worker would have been “regarded… as employed in employed earner’s employment by the client”, then the service company would need to operate secondary Class 1 contributions.
Huff and puff
Counsel for Big Bad Wolff referred to documents published by HMRC, including the explanatory notes to both the regulations and other legislation. Based upon these, it was suggested that the intermediary regulations only applied where – absent the service company – the actor would have been an actual employee of the producer.
In the company’s view, this would not include individuals caught by the Cat Regs, who remained self-employed under general law.
The UT, like the FTT before it, was not persuaded to place weight on what the explanatory notes said because they:
are designed as high-level explanations and don’t extend to detailed exploration of the technical minutiae of the legislation;
will often include summaries of statutory provisions prepared by people who are unskilled in statute law;
may simply reflect the views of the government, as distinct from parliament; and
may be wrong or misleading.
The judge also noted that: “The courts will resist attempts to elevate the notes to a status where they supplant the language of the legislation itself.”
The Intermediaries Regulations merely require the actor to be “regarded as” an employed earner in the hypothetical arrangement ignoring the service company. Cat Regs would treat the earnings as those of an employed earner if the services were provided directly. This clarity takes precedence over any doubts introduced by extra-statutory material.
Counsel for Big Bad Wolff also argued that IR35 was a “unitary code”, and therefore both the income tax elements and the NIC elements should operate in close lock-step.
Since the income tax part of IR35 was expressly targeted at “disguised employment”, then surely the NIC element should similarly only apply where self-employment is not an issue?
The UT was having none of this and demolished the suggestion robustly, noting that “the income tax and NIC provisions were not identical before IR35 and so there is no compelling reason to assume that the IR35 provisions would operate identically across both”.
Furthermore, if the service company had never been there, the post-IR35 income tax and NIC consequences for a genuinely self-employed actor such as Glenister would not have been “unitary”.
There would have been no income tax consequences, but the Cat Regs would have imposed NIC. Why should the service company suddenly render IR35 “unitary”?
What big teeth you have!
The UT concluded that the proper purpose of the law was to ensure that individuals who provide services via an intermediary should suffer NIC to a broadly similar extent as they would have been if the services had been provided directly.
Big Bad Wolff’s appeal was dismissed. Glenister, and numerous other actors who used service companies prior to 2014 will need to account for NICs.