Lorraine Kelly is off the hook after winning a blockbusting £1.2m IR35 tribunal appeal against HMRC. Rebecca Cave analyses the case and looks where the tax authority's demand fell short.
Kelly and her husband set-up their personal company Albatel Ltd in 1992, eight years before the IR35 provisions were introduced in April 2000. Albatel provides Kelly’s services in a variety of roles as a broadcaster, actress, model and writer to a range of clients.
The dispute was about a contract between Albatel and ITV Breakfast Ltd signed in 2012 under which Kelly’s services would be provided for a 30-month period for the TV programme Lorraine, and for a shorter period for the programme Daybreak. The ITV work amounted to 33% to 37% of Albatel’s turnover, which increased to 65% to 69% when Kelly also presented Daybreak. HMRC accepted that Kelly’s other assignments charged through Albatel did not fall within IR35.
Classic status tests
In order to determine if IR35 applied the judge had to examine whether a hypothetical contract between Kelly and ITV had the attributes of an employment contract, or if it appeared to be a contract for services (a self-employed arrangement), in which case IR35 would not apply.
To help with this task the judge rehearsed the issues decided in key employment status and IR35 cases, including the most recent case involving the TV presenter Christine Ackroyd (a newsreader). As a result, this case report provides an excellent tutorial on how to handle an employment status dispute.
A major part of the evidence was the written contract between Albatel and ITV, but also how that contract was in fact performed. HMRC had a formal meeting with three ITV executives about the organisation’s relationship with Lorraine Kelly in July 2015, which included Ms Walton, the editor of Lorraine.
HMRC placed a great deal of importance on the answers given at this meeting, but the judge commented: “In relation to the evidence given by Ms Walton we accepted her evidence that the purpose of her meeting with HMRC in 2015 was not clearly explained to her and that although she had signed the notes of the meeting, she had not been responsible for the amendments made.” This should be a warning that interviews with HMRC should always be approached with caution, as the information collected may be used for a purpose which is not immediately obvious.
The judge examined the following attributes of the hypothetical contract:
Mutuality of obligation (MOO)
ITV was obliged to pay Kelly for the services performed, and there was an expectation that she would provide those services for 42 weeks a year. This illustrated a mutuality of obligation, but the judge found that this did not determine the issue.
Control over the worker
HMRC argued that ITV retained control over Kelly with regard to OFCOM obligations, and that it was the program editor who exercised that control. However, the tribunal found that OFCOMs role as regulator was irrelevant to control in this context. Also, the editor’s control was misconceived. There was minimal supervision or control over Kelly.
Right to provide a substitute
Although the programme was aired throughout the year, Kelly was only required to provide her services for 42 weeks per year and she was instrumental in identifying substitute presenters for the periods she was absent. ITV could determine whether or not to accept that substitute.
Kelly was not entitled to sick pay, holiday pay, employer pension entitlements, training or appraisals. The absence of all of these factors indicated that Kelly was not treated as an employee by ITV.
In business on own account
HMRC argued that Kelly could not increase the profits she made from providing services to ITV, she took no financial risk, and thus was not in business on her own account. The judge took the opposite view; Kelly bore a significant financial risk that programme could be pulled by ITV, or that sickness would prevent her from performing.
Part and parcel of the organisation
Kelly carried out a variety of work from writing to designing and advertising a fashion line, and she appeared on other television shows. She could not be considered to be part and parcel of ITV. The judge concluded that ITV was effectively buying the application of the Kelly brand.
In examining all of these factors together and making a qualitative assessment of the evidence, the judge concluded that the relationship between ITV and Kelly was a contract for services, and IR35 did not apply.
There was a secondary issue in this case as to whether Albatel Ltd could deduct from its income the fees it paid to Kelly’s agent for negotiating the contract with ITV (under ITEPA 2003, s 352). A deduction for agency fees only applies if the earnings are from employment as an entertainer, so there was much discussion as to whether Kelly was treated as an “entertainer” in her work for ITV, which the tribunal decided she was.
However, as the ITV contract fell outside of IR35, it was not an employment contract and the question of the deduction of the agent’s fees didn’t strictly have to be resolved.
Rebecca Cave discusses the Lorraine Kelly case with editor Tom Herbert in this week's No Accounting For Taste podcast. Click the play button above to listen. The Lorraine Kelly conversation starts at around the eight minute mark; however, stay tuned for more accounting news on another national minimum wage underpayment, getting to your first £100,000 and whether firms should microchip their staff.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.