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A radio studio | AccountingWEB | Adrian Chiles loses IR35 appeal over £1.7m tax bill
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Adrian Chiles loses IR35 appeal over £1.7m tax bill

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TV show host and Radio 5 Live presenter Adrian Chiles has lost his IR35 case at the upper tribunal. The case has been remitted back to the first tier tribunal for them to remake the decision and if he loses, Chiles will owe HMRC £1.7m in tax and NICs. 

10th Jun 2024
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HMRC has won its appeal against Adrian Chiles’s personal service company Basic Broadcasting Ltd (BBL) at the upper tribunal. In 2022, Basic Broadcasting Ltd won its IR35 case at the first tier tribunal (FTT) where HMRC was seeking to recover £1,249,433 in tax and NICs of £460,739.

HMRC’s appeal was initially deferred in order for the judgment in Atholl House CA to be handed down, HMRC then revised its submission.

For the facts of the case see my article from 2022 on the former One Show presenter’s IR35 showdown with HMRC, but basically, this appeal is concerned with tax years 2012-13 to 2016-17.

During that period BBL provided Mr Chiles’ services to two ITV contracts and three BBC contracts in addition to other work for other parties.

Kickabout

In considering the application of the intermediaries’ legislation (IR35), it is well established now that the tribunal first needs to look at the three-stage analysis of the hypothetical contract in Kickabout productions. This has been summarised as follows by the Court of Appeal in Kickabout Productions Ltd v HMRC [2022] EWCA Civ 502 (“Kickabout”) at [7]:

(1) Stage 1: Find the terms of the actual contractual arrangements and the relevant circumstances in which the individual worked.

(2) Stage 2: Ascertain the terms of the “hypothetical contract”.

(3) Stage 3: Consider whether the hypothetical contract would be a contract of employment or a contract for services.

The third RMC stage

At Stage 3 of this analysis, the tribunal then turns to the three-step test in Ready Mixed Concrete set out by McKenna J some 50 years ago. This three-step test basically looks at mutuality of obligations and then control and finally the ‘third RMC stage’.  

The position regarding mutuality of obligations is still awaiting the judgment of the Supreme Court in HMRC v Professional Game Match Officials Ltd. The approach to be taken in Stage 2 and the third RMC stage must now be seen in the light of HMRC v Atholl House Productions Limited [2022] EWCA Civ 502 (“Atholl House CA”), and the meaning and significance of a taxpayer being ‘in business on their own account’ continues to evolve.

Grounds for appeal

The grounds of appeal by HMRC are critical to understanding the appeal and what further guidance the tribunal gives to the FTT to re-make the decision. So, the FTT granted permission to appeal on the following grounds:

(1) The FTT erred in law in its interpretation and/or application of the third stage of the RMC test in that:

  1. The tribunal wrongly adopted the test of whether Chiles was in business on his own account, instead of the correct analysis required at the third stage of the RMC test; and
  2. The tribunal did not put the relevant terms of the hypothetical contracts at the heart of its analysis at the third stage of the RMC test; alternatively, did not take those terms into account.

(2) Further or alternatively, the FTT erred in law in its approach to the question whether Chiles was “in business on his own account” in relation to the relevant contractual engagements.

Atholl House CA

The decision in Atholl House CA is central to this appeal in relation to the meaning and significance of the “business on own account” test and its application at the third RMC stage.

It was confirmed in Atholl House CA that the level and nature of control is to be considered in the third RMC stage but, that there is not a prima facie assumption of employment. There is no one approach concerning the third RMC stage but, there are permissible approaches which the FTT did not take. 

The central enquiry

The FTT had focused unduly on the business on own account test and had failed to keep the terms of the hypothetical contracts at the centre of its enquiry. The crux was whether the BBC/ITV contracts were part of being ‘in business’ or whether they were outside of it.

In addition, the weighting of the terms of the hypothetical contract is a matter for the FTT’s evaluative judgment and not something that HMRC can interfere with.

The tribunal, therefore, allowed HMRC’s appeal under Ground 1 that the FTT erred in law by adopting the wrong approach to the determination of the third RMC stage. There was no need to consider Ground 2 of the appeal because the UT had accepted Ground 1. 

The tribunal did, however, go on to consider the ‘knowledge issue’.

The knowledge issue

The ‘knowledge issue’ was described as whether relevant matters were “…known or reasonably available…” to the BBC and/or ITV at the relevant time. The knowledge issue is not referred to in the Court of Appeal’s decision in Kickabout, but it was referred to in Atholl House CA, which was heard at the same time.

BBL objected to HMRC raising this as grounds for appeal. In granting permission to appeal, Judge Cannan left this matter to be determined by the upper tribunal (UT). The UT reached the conclusion that, on balance, HMRC should be permitted to raise the argument. 

The argument being that the FTT erred by failing to make findings as to whether factors identified as relevant at the third RMC stage were within the actual or constructive knowledge of the BBC and ITV, as described in Atholl House CA.   

This was particularly in relation to Chiles’ activities outside the BBC / ITV contracts. The new argument relates to a change in the legal principles which had been generally understood to be applicable.

Although the tribunal acknowledged the stress that this was causing Chiles, they allowed the appeal and remitted the decision for reconsideration by the FTT, on the basis of:

  • the correct approach of the third RMC stage; and
  • the knowledge issue

Conclusion

IR35 has become a quagmire of tests and re-testing at the expense of the taxpayer.  Technically it was correct for HMRC to appeal, as has been seen by the outcome of this appeal.

HMRC seemingly has no choice in order to try and establish the correct approach to determining whether IR35 applies or not. In my view, however, the next government needs to reconsider implementing a statutory test.

One very telling part of this judgment was the following from Judge Thomas Scott: “Presented with this moving target, taxpayers and their advisers must nevertheless grapple with whether the legislation applies to any particular engagement, and the courts and tribunals must do the same.

“However, it should not be forgotten that behind every personal service company is a person, and, as we have seen in this case, the uncertainty and financial exposures generated by the difficulty in establishing a clear and stable legal position continue to produce a very real human cost.”

We will update the article with a link to decision when it becomes publicly available.

 

Replies (21)

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By richards1
10th Jun 2024 10:08

What would be telling is how much tax Chiles actually paid on his "income", before we consider the human cost of the process on him.

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Replying to richards1:
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By Mallock
10th Jun 2024 11:35

There is no doubt that Adrian Chiles will still have paid a significant amount in tax (19% Corporation Tax and 33.75/39.35% dividend tax). IR35 legislation is draconian in that it prevents deductions from profit for what many would consider to be legitimate business expenses. It is flawed legislation and the complexities of this case and others show how broken it is.
I think the judge was entirely correct to mention the human cost and I certainly wouldn't want to live for years with the uncertainty IR35 has brought to Chiles life and his future financial security. Compassion works two ways.

Thanks (13)
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By Paul Crowley
10th Jun 2024 10:28

This was all encouraged by the BBC.
As it really is the state broadcaster, shame on the state for trying to evade the cost of employees.

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Replying to Paul Crowley:
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By richards1
10th Jun 2024 10:32

Any right thinking person (and no doubt advised by the Accounting profession) would know that it was a way of avoiding tax and as such those "broad shoulders" not taking their fair share.

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Replying to richards1:
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By Mallock
10th Jun 2024 11:52

And many right thinking people will know that there were lots of situations where the choice was to operate through your own company or not get the work at all.
However since the changes to IR35 and the blanket approach by agencies and large corporates, we have had several clients leave the country, retire or give up their specialism because they could only get work if they went through an umbrella company. This precluded their claims for not insignificant but legitimate travelling and accommodation expenses and they weren't prepared to suffer those costs and not receive a deduction.
As the saying goes, it was the straw that broke the camel's back. Broad shoulders can only take so much strain before they give up whether through stress or because they have had enough. Politicians need to learn from the past - when Margaret Thatcher reduced the top rate of tax from 60% to 40% the amount of tax collected increased. At the moment we have a 60% rate of tax in England and Wales and a 67.5% rate in Scotland for income between £100K and £125,140. Every day in life I see people taking action to avoid these rates including many consultants in the NHS reducing the number of days they work and restricting the availability of their essential skills.
If tax is fair people will pay it and won't take action to avoid it but current rates have already reached the breaking point.

Thanks (14)
Replying to Mallock:
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By phoare
10th Jun 2024 14:31

> "when Margaret Thatcher reduced the top rate of tax from 60% to 40% the amount of tax collected increased"

Citation required...

I believe the share of tax collected from income tax dropped following the tax cut, but that drop was more than countered by the raising of VAT from 8% to 15%. So yes, overall the amount of tax collected increased but not the overall amount from income tax.

My citation: https://ifs.org.uk/taxlab/taxlab-key-questions/how-have-government-reven...

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Replying to phoare:
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By Mallock
11th Jun 2024 11:07

Not necessarily true. The percentage of total tax revenue which came from Income Tax fell but that doesn't necessarily mean that the amount of income tax fell.

I had a very wealthy great uncle (war hero and self made millionaire) who left the UK when Harold Wilson put the top rate of tax up to 98% (83% income tax and 15% investment income surcharge). He took all his wealth and spending elsewhere. However when the top rate of tax was reduced to 40% he came back to the UK where he paid tax again. Lots of actors, entertainers etc did the same.

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Replying to Mallock:
Rob Swan
By Rob Swan
11th Jun 2024 19:20

Exactly why super-taxing the super rich never works.
Anyone who thinks it's a good idea obviously hasn't a clue.

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By ireallyshouldknowthisbut
10th Jun 2024 10:47

I am not sure how the average tax payer or advisor is supposed to know with reasonable certaintly if somone is or is not inside of IR35 as those regulating it dont know either.

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Rob Swan
By Rob Swan
10th Jun 2024 11:31

Poor Adrian. I really feel for the guy.
As for HMRC, the BBC and anyone else responsible... Words fail me.

Thanks (8)
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By jon watkin
10th Jun 2024 11:46

Presumably AC has made some payments on account already after all these years so the effect of a £1.7m tax & nic demand should not be as traumatic as it would be to the average taxpayer on a more modest income. That aside, the amounts paid to certain media celebs is fantasy land and yet still it seems it's never enough for them.

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Replying to jon watkin:
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By kim.shaw-and-co.com
10th Jun 2024 17:36

jon watkin wrote:

Presumably AC has made some payments on account already after all these years so the effect of a £1.7m tax & nic demand should not be as traumatic as it would be to the average taxpayer on a more modest income.

... and what about the costs of the UT appeal and now another round at the FTT ?

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By yourai.support
10th Jun 2024 12:42

In criminal law (and pretty much all law) guilt is determined on factual evidence - the fact that HMRC's central case for IR35 (the "hypothetical" contract) is based solely on conjecture clearly proves that IR35 needs scrapping. The first thing the new government needs to do is to force all tax cases to be based solely on factual evidence and to stop this "I say you're guilty, prove me wrong" approach of HMRC

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Replying to yourai.support:
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By More unearned luck
11th Jun 2024 12:31

As you know, in tax cases the burden of proof is on the taxpayer to prove HMRC's assertions are wrong. How could it be otherwise? The taxpayer has or should have the evidence to prove the truth of the matter. HMRC doesn't.

If there are unexplained credits to restaurateur's private bank a/c, HMRC can and probably would assert that they were omitted business receipts. The fact that the taxpayer offers no explanation and has not retained any records would, on your basis, mean HMRC couldn't prove its case. As it is it is and if the credits are not business income, the taxpayer is the one that suffers from not giving an explanation and in failing to keep records.

For the sake of completeness, the burden is reversed in penalty cases and the standard of proof in tax cases is the balance of probabilities and not the criminal standard of beyond reasonable doubt (even in penalty cases).

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By the_Poacher
10th Jun 2024 19:01

Non director employees get a really rough deal in this country, glad to see the privileged getting stuffed too

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Replying to the_Poacher:
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By Rammstein1
11th Jun 2024 08:28

The politics of envy?

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By AndrewV12
11th Jun 2024 09:03

If he is paying £1.7m in tax and NI, how much is he earning, bearing in mind he does not do much work on telly and radio now.

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By G-BIZ
12th Jun 2024 10:16

It all just proves how ridiculous IR35 is!! The very basic facts were that all the broadcasting companies insisted that all of their higher paid presenters were engaged via a limited company in order to avoid employers national insurance contributions and employee rights. The presenters set up the limited companies as instructed by the end client and took salary, expenses and dividends as any normal person would given the complexity of determining status so much so that it is worthy of examination many times by experts at tribunal and court hearings and laughable you can have two individuals working for the same companies doing very similar jobs but have a different outcome at appeal (lorraine Kelly/Eamon Holmes) because ones legal council is savy enough to put forward the case they are an entertainer and not presenter and clearly why the onus was put back on the end client to determine status as hmrc knows they wont be interested and will engage them via an agency to continue to avoid dealing with employee rights . He will have paid a huge amount of tax on his income already and cases like this should be scrapped and more focus and resources put into ensuring employers are complying with the current rules which would likely generate much more revenue than they will get from chiles once the tax that has already been paid has been offset and you deducted the overall staffing and legal costs dealing with a case of this nature....or actually put the resources into recovering the billions that was fraudulently claimed and given out without any due diligence during covid.

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Replying to G-BIZ:
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By FactChecker
12th Jun 2024 18:09

"The very basic facts were that all the broadcasting companies insisted that all of their higher paid presenters were engaged via a limited company in order to avoid employers national insurance contributions and employee rights" ... "insisted"?!?

I'm sure they were *happy* to accept that option ... after all the BBC had led the way in the 1990s, having senior Executives paid as self-employed via their companies.
Anyone remember John Birt who, as deputy D-G, was found in 1993 to be being paid as a freelance consultant despite being a full-time employee of the Corporation ... see https://www.independent.co.uk/news/bbc-helps-its-chief-to-avoid-tax-excl...

BUT when they want a new contract for a 'star' presenter (sorry, entertainer) they aren't saying ... you're freelance or f**k off. It suits both parties, sure, but the personality is hardly an injured innocent being bullied by the big bad Broadcasters.

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By tonyaustin
12th Jun 2024 21:31

The obvious reason for an individual being told by an organisation that they would only get the contract if they used a personal service company is that the organisation was worried about being hit with a liability for employer's NIC and failure to deduct PAYE. Therefore in agreeing a rate of pay, the individual should have budget for the effects of IR35.
If the individual chose to use a company they should have been aware of the IR35 risk.
Sadly, many were unaware of the risk or badly advised. HMRC gave a false sense of security by not challenging such individuals at an early stage, so they thought their tax position was correct, thus allowing a large liability to accumulate. Only now, after 7 to 12 years in this case, has a decision been reached. The BBC, ITV and HMRC must be partly responsible as well as AC and his advisers.

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