TV’s Lorraine Kelly has HMRC for breakfast

Lorraine Kelly
ITV
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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. 

Evidence

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.

Salient points

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.

Employment benefits

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.

Overall

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.

Entertainer

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.

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By dstickl
22nd Mar 2019 10:08

BRAVO !

Thanks (6)
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22nd Mar 2019 10:16

A good summary of the case - yet again IR35 twists and turns!

Now, where's that ITV telephone number...

Thanks (3)
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22nd Mar 2019 10:26

Interesting case, particularly for my HND accounting students studying business tax and income tax. One of the assessments is on the subect of employment contract v contract for services. I will let my students view the content of this article for a "real" case on the subject!

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22nd Mar 2019 10:34

Very good article and a good starting point for what will no doubt turn into a forensic examination of these issues when HMRC wastes yet more time and money in the inevitable appeal.

Couple of issues though.

First, why did HMRC take such a hopeless case? I get the fact that they want to use a household name to get the publicity, but to risk doing that and losing shows a deep and disturbing lack of judgement at HMRC. The problem, in my opinion, is that HMRC is blind to the risk/reward algorithm and their internal dogma is to select those parts of the LSS that they like and use that to justify prosecution.

When will HMRC engage a "fresh pair of eyes" on such cases? If they did so here, they would never have taken this.

Second, Ms Kelly was never "on the hook" for IR35. The Judge is clear and cogent in the reasoning. Not mentioned in much detail however is the fact that the company had been going since 1992. IR35 arrived in 2000. The contract was signed 2012. Presumably the CT return was made in 2013. Yet it took 6 years to get to even FTT. That is no doubt 6 years of Ms Kelly's life lived under constant stress and perhaps distress for all I know. Completely unacceptable in any civilised society, especially when perpetrated as a deliberate and sustained policy by a public body.

I have other points but will come back later.

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22nd Mar 2019 10:43

There’s a lot to like about this judgement. A small twinkling star on the darkling plain which in recent years has sadly become the backdrop for IT contractors and others forced to work through limited companies to deliver their independent services.

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By mkowl
22nd Mar 2019 11:05

It is interesting not just from the IR35 side. Just in the early stages of an Employer Compliance Review and the HMRC officer is very keen on exploring the use of subcontractors by the client - all via PSC's. I can understand but she is keen to discover the employment status checks my client has done, presumably to potentially utilise this down the line so to speak.

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22nd Mar 2019 11:55

This was far from a hopeless case from HMRC's point of view. Para 52 shows the contract wording could have been fatal for LK, but what's interesting is that the quasi-sham IR35 analysis actually worked in her favour (this usually work against a taxpayer of course) by nullify the prejudicial effect of that wording per my comments here:https://www.accountingweb.co.uk/any-answers/lorraine-kelly-case

I note other people in the link below mistakenly think this was something of a slam-dunk case for LK to win, but that was certainly not the case in my view.

https://www.accountancydaily.co/tvs-lorraine-kelly-wins-ps12m-ir35-appeal

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to Justin Bryant
22nd Mar 2019 12:27

It may have been "far from hopeless" but it was equally far from the terms and conditions in the LSS. These require that absent a public interest motive, there is at least a chance of securing a win. To move into litigation without that is reckless.

It also risks throwing public policy into disarray. HMRC has long advanced the theory that the contract and its terms is just one part of the equation in measuring what the actual relationship is between worker and engager. They claim that the actual work done and the manner of it happening carries more weight than the words on the contract.

I would agree. Not only is that sensible but it aligns with judicial principles.

Here, that argument seems to have been disregarded by HMRC who have poured their energy into looking at the words and ignoring the deeds. That inconsistency is also reckless in that it undermines public policy.

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to G Webber CTA
22nd Mar 2019 13:25

I disagree and her win was quite a lot to do with having a good barrister I think. Also, if this was unreasonable HMRC conduct he, more than anyone, would have asked for an appropriate cost order against HMRC.

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to Justin Bryant
22nd Mar 2019 13:36

There is a world of difference between HMRC bringing a case that was unlikely to win and which any commercial party would regards as unreasonable and the rather purist and higher barrier imposed by Tribunal rules.

To argue that she won because she could afford a better barrister is brave. Do we get the justice afforded by the law or do we get the justice we can afford?

We all know that costs against HMRC on any grounds, including unreasonable behaviour, is rare and any commercial minded barrister knows this and will not waste client fees in such a pursuit.

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to G Webber CTA
22nd Mar 2019 14:13

I find it odd that there are many people like you arguing as you do. See link below for more examples of this.

https://economia.icaew.com/news/march-2019/lorraine-kelly-wins-12m-tax-c...

The fact is LK won per my comments in the above link and it's also odd that so few other people have correctly pointed this out as basically the only reason she won (apart from having a good counsel to point it out of course based on the facts). See one of the few examples of this as follows from the link below:

"The difference between the Kelly and Ackroyd cases, according to Lorraine Kelly's counsel, was that ITV has no right to tell her or Albatel what to do, whereas the BBC could direct Christine Ackroyd to present any programme of their choice."

https://www.step.org/news/hmrc-loses-key-personal-service-companies-case...

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to Justin Bryant
22nd Mar 2019 14:32

Why is it "odd"?

HMRC's case was full of holes. The points raised by their representative were discussed by the Judges and in pretty much every instance they preferred the analysis of Ms Kelly's representative. There is even the suggestion that HMRC misled the views and answers of third parties and tried to claim that Ms Kelly was evasive and elusive in how she answered questions. This also the Judges remarked upon to the detriment of HMRC's case and in particular its presentation.

I therefore do not find it "odd" that any reasonably objective professional should read the case and come to the conclusion that it was taken on such a biased interpretation of the facts as to be unreasonable.

You are perhaps implying that I act out of commercial interest which colours my view? I do run a firm that specialises in contractor tax enquiries, but not IR35 status enquires - yet. We are preparing for the inevitable continued raid on our clients via such status reviews, hence my interest here. Does that colour my view? Probably it does. Does your experience, commercial or academic view, influence your opinions? I suspect they do even if you think not.

Does it matter that we have partially subjective views? I think not. The facts here and the analysis of those facts as presented by the Judges are clear. No reasonable person could claim that Ms Kelly was an employee of ITV.

I suggest that HMRC knew this prior to going to Tribunal, hence their cynical attempts to cast doubt upon the integrity of the witnesses, despite the Judges saying that the terms under which they gave evidence to HMRC were not explained to them and HMRC made subsequent amendments to meeting notes without their knowledge.

I make no comparison to the Ackroyd case. That is entirely different and stands or falls on its own merits.

I do not find it "odd" to criticise HMRC for wasting my money.

Thanks (4)
22nd Mar 2019 11:57

This case demonstrates once again that it should not make a difference for tax purposes whether you choose to be employed, a sole trader or Ltd Co director for tax purposes. The key is of course amalgamating tax and NI, rationalising travel deductibility and either making owner-managed companies "see-through" for tax purposes or re-introducing rules to deter people from accumulating unnecessary funds within a corporate structure (anyone remember the close company apportionment rules?). HMRC are trying to solve what should be a non-problem.

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to Julian Stafford
22nd Mar 2019 12:36

"Unnecessary funds"?

If tax is to be a neutral factor in choice of how to work, then HMRC cannot be allowed to dictate personal financial management.

You will also find that those who are self employed or operate via a PSC (often at the insistence of the engager) are taking more risk (no sick pay, no holiday pay, no insurance, training, etc) that is not always reflected in the rate of remuneration. That is not in itself a reason to "game" the tax system, but rather a principle that the tax system has recognised for decades and which provides for an arguably more generous application of the rules.

That generosity is declining but still exists. Modern ways of working are making the tax rules more and more inappropriate and I agree that a root and branch review is needed, not just of the rules but crucially how they are applied by an increasing desperate HMRC out to "maximise revenue".

Tax policy driven by a dogma based on maximum money grab will drive more and more honest and hard working people into the arms of tax planners, promising something for nothing.

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to G Webber CTA
22nd Mar 2019 19:19

I completely agree and of course working any way other than through a limited company is rarely an option for independents these days ironically due to IR35.

HMRC's massively simplistic one size fits all approach which seems to be predicated on the assumption that everyone using a limited company is doing it to avoid tax and to mask actual employment is a disaster.

In my experience in the IT contracting industry there are many who are nowhere close to conforming to that stereotype. Indeed a combination of circumstances including the very significant competition for work from outsourcers, the constant turning of the screws by HMRC (IR35, Dividend tax, off payroll working, effective abolition of VAT FRS etc.) and now possibly Brexit threatens the viability of many small self employed contractors.

Paradoxically post Brexit opting to work exclusively in continental Europe (if possible) and to pay taxes in whichever country the contract is based from day one may sadly prove to be a better tax management strategy than allowing HMRC to destroy one's business.

I truly think they have lost the plot!

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22nd Mar 2019 12:08

Good result and a well reasoned judgement.

As others have mentioned, the real issue is NIC, which distorts the whole tax system, along with Gordon Brown's massive pension raid disguised as a scrapping of the tax known as ACT, which means dividends don't reflect the tax already paid on the profits but get taxed again.

If HMRC want to be serious about 'looking through' PSC's then a good first start would be to reform the dividend system to level the playing field- maybe they should take a leaf out of the Irish tax system on this.

Whilst NIC is so high, it's not going to happen.

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22nd Mar 2019 13:32

God knows how many subbies HMRC will now attack to get some payback

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22nd Mar 2019 14:51

At last a judge has had the guts to stand up to the bully-boys at HMRC who prolong these cases for an unreasonable length of time causing acute stress to the taxpayers concerned.
Crucially, I believe, the judge took into account that although in theory ITV had the right to edit the programme, in practice, with live television, it is impossible for a TV company to control the presenter. She is engaged because of her special expertise in running informative and fluent interviews which by their nature cannot be scripted or controlled.
Will HMRC learn anything from this? Don't hold your breath!

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22nd Mar 2019 15:47

Shame on her! The end must come so that the wealthy can still buy tax advantages. This is totally wrong. HMRC must do something about this as it is clearly nonsense. Pay your fair share and stop whinging Loraine

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to mattthetax
22nd Mar 2019 15:55

That's sarcasm, right?

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22nd Mar 2019 16:14

I had (I ditched him a year or so ago) one PSC client under an IR 35 enquiry from 2013/14. It may still not have been resolved, so the LK case is not in HMRC terms, overly long. He was clearly not an employee, rather an electrical contractor but the key word which HMRC love to apply is 'deemed' - and on that basis they pursue what could be a hopeless cases.
The 'deeming' of course, is applied by HMRC.

Good win by LK though.... ammunition for the future.

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By mominnz
23rd Mar 2019 03:28

The Judge got it completely wrong. its a clear IR35 case and everyone knows that clearly.

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to mominnz
25th Mar 2019 09:20

Let me make it quite clear. HMRC have no right to interfere with Employment Status (that is why they lose a lot of cases). I have always said that if the "contract for services" is solid then HMRC don't stand a chance. The company was formed prior to IR35 so the intention was not to circumvent IR35. This case should never have come to FTT.
Where I am amazed is that the notes were signed. Notes are a guide to what was said or interpreted at a meeting. They are not an agreement therefore should never ever be signed.

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By mominnz
to johnjenkins
25th Mar 2019 12:26

1. HMRC has full/complete right to know the employment status.
2. Even if the employment was setup before the IR35 it does not mean that pre IR35 individuals are exempt.
3. If intentions were honest then tax should have been paid according to the status.

Most of the professionals absolutely know the fact is that it's a case falling under IR35. If no one agrees that's a different matter.

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to mominnz
25th Mar 2019 13:23

You must live in a different world or are you Gordon Brown in disguise?
Employment status is and always has been a commercial decision between the work giver and the work doer and has nothing to do with taxation.
IR35 is illegal by virtue of the fact that you cannot take away the Limited Company status as the Limited Company is a separate entity in its own right. Even then if (purely for arguments sake) the worker is deemed PAYE then the Company that the employment is deemed through (namely the original work giver) must bare the costs.
Gordon Brown (the treasury) was short of money through his own incompetence. He started to try and put subcontractors (legally made so by CIS) on to PAYE, when that didn't work IR35 was born.
By the way most of the professionals know IR35 is defunct, even though it rears its ugly head now and again. Even the OTS realised IR35 was wrong.

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to mominnz
25th Mar 2019 09:40

Thanks for clearing that up for us.

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24th Mar 2019 11:02

Slam dunk win for Kelly. Reading the judgment, I sense the judges were not impressed that this even ended up in court. In para 177 they said "we do not consider this a borderline case". It's rare for them to use such words.

She was paid pro-rata to do a specific thing to which she heavily controlled. Which is what self-employed people do really. HMRC are told this time and time again, but they still pursue weak cases that have little merit.

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to davechaplin
25th Mar 2019 13:50

Eh? You should define things by what they are; not by what they are not. Just because it was not considered borderline (having considered all the relevant complex facts and law over many pages) does not (obviously) mean it was necessarily a slam-dunk win! (Also, there is nothing rare at all about such words in such judgments.)

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to Justin Bryant
25th Mar 2019 14:11

The situation of Ms Kelly was obvious to the Judges. It was obvious to her advisers. It was obvious to her. The Judges are unequivocal - she was outside IR35. Her advisers presented their case with equal clarity. Ms Kelly was clearly - and justifiably - upset by what she saw as unfair and bully boy tactics designed to pressure her into accepting an illegal settlement.

This is a case that surely somebody in the no doubt long and tortuous chain of people within HMRC had to have approval from to spend taxpayer money should have had the courage to stand up and say "can we win this"?

I cannot believe that all the people in that chain had a view that the case would be won. Worse, some of them would have foreseen the loss and realised that losing another case in this space would expose them.

This is a slam dunk win and whilst I anticipate an appeal (wasting more money), HMRC will lose again because any reasonable person can see it's an unwinnable case for HMRC.

You may have good reason for urging all us responders here to see this in a more balanced way and that is to your credit. However, the HMRC case was hopeless, has been shown as hopeless and I for one hope that common sense makes a rare appearance at HMRC and this is the last we hear of this.

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By tedbuck
25th Mar 2019 12:02

I don't agree with what she did but am I glad to see the HMRC incompetents get egg all over their faces yet again. They are a bunch of arrogant jobsworths with no idea of what is right or wrong. Look at the NMW episode with Iceland - absolute rubbish.

I can remember when HMRC people were sensible, competent and helpful and deserved respect for doing a difficult job. Now they are driven by rules they don't fully understand, computers that malfunction and software they don't understand and instead of challenging dodgy schemes when they are borne and the multiplicity can be stopped in its tracks they wait years and years so that they can make a big hit - and then they lose.

I'll bet that no-one even got a rollicking for the waste of taxpayers' money.

Trouble is where one used to feel that taxpayers should pay their dues the dues have become so unreasonable that one's sympathy is veering the other way - hence 'Good for Lorraine!'

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to tedbuck
25th Mar 2019 14:33

I'm surprised at your comment "I don't agree with what she did".
She set up a company to deal with all her income (potentially or otherwise) many years ago. Why should she even be challenged for the purpose of HMRC to reach targets with creative taxation.

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to johnjenkins
25th Mar 2019 18:24

What she did was perfectly legal, well established and sensible. Folks may not agree with it, but that doesn't make it wrong. HMRC got their comuppance on this one.

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By rajwik9
28th May 2019 15:57

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