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HMRC scores a win and a rematch in key IR35 cases

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Two key IR35 cases to decide the employment status of broadcasters Paul Hawksbee and Kaye Adams were recently heard at the Court of Appeal, with very different outcomes.

 

27th Apr 2022
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Paul Hawksbee worked through his company Kickabout Productions Ltd as a regular presenter for TalkSport Radio for over 18 years, although the case only examined the contracts in place in 2012/13 to 2014/15. Kickabout was contracted to provide Hawksbee to present 222 programmes per year, and he did not work as a radio presenter for any other stations.

The first round at the first tier tribunal (FTT) produced a draw, with Judge Scott providing his casting vote in favour of the taxpayer. HMRC was successful at the upper tribunal (UT), and Kickabout was given permission to appeal.   

The Court of Appeal agreed with the UT that TalkSport was required to offer Kickabout work on 222 programmes per year, and Kickabout was obliged to make Hawksbee available for that work. There was a mutuality of obligation to provide and perform work.  

The other significant ground for appeal was whether there was sufficient control by TalkSport over how, where and when Hawksbee worked for the station. The Court of Appeal agreed with the UT that sufficient control was exercised to demonstrate an employment relationship existed between the parties.

Re-run for Adams

Kaye Adams offered her services as a freelance journalist through her company Atholl House Productions Ltd. The dispute with HMRC concerned the contracts for her to present regular shows on BBC Radio Scotland in 2015/16 to 2016/17. The contract was for Kaye to present 160 shows per year, but this only provided 50% of her freelance income in that period.  

Atholl was successful at the FTT, and HMRC appealed to the UT, where it lost. 

The Court of Appeal was asked to consider whether the UT made mistakes in the tests it applied as to whether Adams was in business on her own account, and the aspects of mutuality of obligation, and control.

Hypothetical contracts 

This was a far more finely balanced case than Kickabout, as Kaye Adams has an extensive freelance career covering different media including print, radio and TV.  

The lower courts put much emphasis on Adams’ other freelance activities both during the periods the BBC contracts related to and the surrounding tax years. However, the judge in this case thought this was the wrong approach saying: “It is not the terms and circumstances of her other engagements that are in issue, but the terms and circumstances of her hypothetical contracts with the BBC.”

The judge pointed out that an individual can perform similar services both as an employee and as an independent contractor in the same tax year and emphasised that: “It is not the activities that matter but the capacity in which, and the conditions under which, they are performed.” 

The Court of Appeal was also concerned that the UT had looked at periods that were not under examination: “If the UT’s reference to ‘surrounding tax years’ was intended to include years after the years in question, that must be wrong. Ms Adams’ activities in later years cannot be used to assess whether she was employed in earlier years.”

The Court of Appeal clearly thought that the UT failed to consider all possible terms of the hypothetical contract between Adams and the BBC, including any that could point towards an employment relationship. It therefore decided to send the case back to the UT to be reheard. 

Pressure on taxpayer 

Fighting such tax cases puts an enormous financial and emotional strain on the taxpayer. Kaye Adams commented after this decision: “Two tribunals have already found in my favour and yet I am being placed back on the punitively expensive legal merry-go-round. The costs of defending myself now far outweigh the amount of tax that HMRC claim is at stake. Unlike HMRC, the hundreds of other freelancers under HMRC's spotlight do not have the bottomless pit of the public purse to dig into, and this inequality of arms is one reason many are choosing not to appeal.”

Clear definition needed   

The Judge in Adams’ case commented: “It would certainly be desirable if there were one clear test or approach to determining whether a person was an employee. Important legal consequences flow from this determination.”

Indeed, that is exactly what we need – a clear definition of employment as opposed to self-employment. At present an engager cannot be clear as to whether a person presenting themselves as freelance is truly self-employed, whether they fit in the in-between category of “worker”, or if they should be treated as a deemed employee under the off-payroll working rules.  

The HMRC’s main tool to decide employment status, Check Employment Status for Tax (CEST), is close to useless. Those government departments that relied on that tool found they had to pay massive sums of additional PAYE/ NIC plus penalties, when HMRC judged that they had made the wrong decisions under the off-payroll working rules.

Replies (17)

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By Hugo Fair
27th Apr 2022 18:35

"CEST is close to useless. Those government departments that relied on that tool found they had to pay massive sums of additional PAYE/ NIC plus penalties, when HMRC judged that they had made the wrong decisions under the off-payroll working rules."

I'm allowed to post one extremely naïve comment per annum, right? So here goes ...

I thought HMRC had announced that they would treat any result output by CEST as valid (albeit with the usual 'get out of jail card' along the lines of "so long as the questions have been answered truthfully and to the best of the employer's ability")?

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By jonharris999
28th Apr 2022 07:36

I agree with Rebecca's comments about CEST. This really is a very serious matter and a dreadful state of affairs. So many people suffer from the results (or supposed, half-baked, subjective, mis-used results) of that tool.

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Replying to jonharris999:
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By Justin Bryant
28th Apr 2022 09:15

I'm not sure that's grammatically correct. I thought HMRC were a "they" rather than an "it". See: https://www.taxjournal.com/articles/hmrc-'they'-or-'it'-

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Replying to Justin Bryant:
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By jonharris999
28th Apr 2022 09:38

@Justin Responding to *my* comment with an accusation of grammatical error when you meant to respond to @Hugo's is surely libellous. Consulting my solictor now.

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Replying to jonharris999:
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By Justin Bryant
28th Apr 2022 11:01

It seems my joke (on HMRC not you) was too sophisticated for some!

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Replying to Justin Bryant:
the sea otter
By memyself-eye
28th Apr 2022 17:41

well, I got the jest (and will defend your honour in court).

I've heard prison food is quite good these days...just avoid the showers!

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By eppingaccountant
29th Apr 2022 09:57

Paul Hawksbee. Lee Hawksbee. Are they one and the same or were there two of them running Kickabout?

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By geoffmw1
29th Apr 2022 10:03

I see the main difficulty here is that substitution is virtually impossible. However if there is no bar in the contract from doing similar work for others self employment would seem to me to be the right answer in most cases. I also think that if research is paid for by the presenter that would also point to self employment. Proper advice to the presenter on drawing up a contract seems essential.

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By indomitable
29th Apr 2022 11:25

The IR35 legislation is a complete dogs dinner! Badly drafted, completely unclear, it appears to be have been written to be purposely vague.

What hope do the public have in trying to interpret it, when you have to go to court in many cases to get a determination or interpretation

Another half-baked ill thought out government policy, that should never have seen the light of day.

That on top of HMRC's totally heavy hand in pursuing unsuspected contractors. Currently have two new clients moved to our firm who have had large tax bills from HMRC trying to claim that they have fallen within the MSC legislation going back a few years. Both it would appear on first glance would fall outside IR35!

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By johnjenkins
29th Apr 2022 11:25

"The Judge in Adams’ case commented: “It would certainly be desirable if there were one clear test or approach to determining whether a person was an employee. Important legal consequences flow from this determination.”

Indeed, that is exactly what we need – a clear definition of employment as opposed to self-employment. At present an engager cannot be clear as to whether a person presenting themselves as freelance is truly self-employed, whether they fit in the in-between category of “worker”, or if they should be treated as a deemed employee under the off-payroll working rules.

The HMRC’s main tool to decide employment status, Check Employment Status for Tax (CEST), is close to useless. Those government departments that relied on that tool found they had to pay massive sums of additional PAYE/ NIC plus penalties, when HMRC judged that they had made the wrong decisions under the off-payroll working rules."
To the Judge in Adams case "there is a clear way forward and that is for HMRC to keep their noses out of something that has nothing to do with them". Employment status always has been a commercial decision, that is why you have all this IR35 rubbish. Rishi, take note.

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By KIKISROSSIDES
29th Apr 2022 15:20

Why not allow any individual to decide whether they wish to be employed or self employed? I had clients operating through MSC's that paid tons in corporation tax. So they they were saving on the NI but so what? These individuals represent a small minority of taxpayers and I do not for one minute believe the amount of tax lost given by the government.
They lost billions during COVIT through their inefficiencies but they go after taxpayers trying to earn a living causing them to waste money in legal costs, which they may or may not have, and at the same time they cause them a lot of stress.

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By jeremybarker
29th Apr 2022 19:37

One solution that no politicians appear to want to consider would be to make employment status have no consequences for tax liability. In other words everyone would pay tax on the same basis regardless of whether they are employed or self-employed. Such a change would immediately make IR35 pointless and also eliminate all the time wasted in determining and disputing employment status for tax purposes.

That way employment status would only matter for employment law purposes (where the classifications are different from employment status under tax law in any case).

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By Justin Bryant
03rd May 2022 10:32

HMRC v Atholl House Productions Ltd [2022] EWCA Civ 501 shows that no-one has understood this legislation properly for over 20 years, as stated by me here:

https://www.accountingweb.co.uk/any-answers/reasonably-interesting-ir35-...

If experienced FTT & UT judges and HMRC cannot apply the IR35 tests correctly, how can we or our clients do so?

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By ireallyshouldknowthisbut
03rd May 2022 15:15

When respected judges cant routinely agree with each other over what the legislation says, you know the law is fundamentally broken.

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Replying to ireallyshouldknowthisbut:
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By johnjenkins
03rd May 2022 15:44

This can also be applied to pension sharing in divorce settlements. It would appear that laws (or the appearance of them) have changed so that there can be different interpretations by our learned council.

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By More unearned luck
18th May 2022 13:45

"Indeed, that is exactly what we need – a clear definition of employment as opposed to self-employment." No its not. What this country really needs is a tax system that places the same burden on taxpayers regardless of the nature of their earned income, save for the mechanics of collection (ie employment income should remain subject to PAYE). IR35 is only required owing to the disparity between employment and SE.

Next year employees could suffer up to five taxes on their pay:
IT
NIC
The social care levy
Student loan repayments
HICBC

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Replying to More unearned luck:
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By johnjenkins
19th May 2022 10:33

We do not need a definition of self-employed. We just need HMRC to keep their noses out.
There is no reason at all why every business (in whatever guise) and worker on PAYE cannot be taxed at the same rate. (yes get rid of NI).
The more complicated you make things the more scope for abuse.

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