Obsequious breakfast TV host Lorraine Kelly has become an unlikely champion for the UK's freelance techies battling IR35 legislation – after a tribunal ruled she did not owe a £1.2m tax bill as she was not an ITV employee.
Her Maj's Revenue and Customs (HMRC) reformed the way off-payroll staffs' tax statuses are decided in the public sector from April 2017: when IR35 shifted responsibility for this determination from the employee to the employer.
Contractors affected by this change have to pay income tax and National Insurance Contributions as if they were staffers rather than being liable for corporation tax via their personal service company (PSC), yet they do not get employee benefits. According to some estimates, IR35 can clip a contractor's net income by a quarter, as it costs the average limited company contractor thousands of pounds in extra taxes and National Insurance.
Perma-smiling Kelly was herself in 2016 handed the tax bill for work at ITV Breakfast for the prior four years, as HMRC concluded there had been a direct contract between her and the TV station. It sent her a £899,912.95 income tax bill as well as asking for more than £300,000 in national insurance contributions.
The appeal was heard at the First Tier Tribunal Tax Chamber in Birmingham in November but the ruling was released late yesterday.
Kelly, who currently fronts morning programme Daybreak, and who penned a contract with ITV via a business she runs with her husband, described herself in the proceedings as a "self-employed star".
The pint-sized Scot was not given employee benefits such as holiday, pension entitlement, sick pay or maternity leave and had no job security. And she frequently carried out work, including an expedition to Antarctica for a magazine, for rival TV and radio stations and other media outlets.
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Judge Jennifer Dean concurred that the agreement Kelly has with ITV was "a contract for services", adding:
"Whilst there is no requirement for a contract of employment to include such features, in our view the absence of them indicates that Ms Kelly was not considered to be or treated as an employee.
"In looking at the overall picture and making a considered and qualitative assessment of the evidence as a whole we have reached the view that the relationship between Ms Kelly and ITV was a contract for services."
HMRC, which wants to extend IR35 legislation to the private sector, said it was "disappointed that the First Tier Tribunal has decided that the intermediary rules (also known as IR35) did not apply in this case".
"We will carefully consider the outcome of the tribunal before deciding whether to appeal," a spokesman told us.
A second consultation on the implementation of IR35 in the private sector took place last month. In it, HMRC promised to keep working on the CEST tool used to check a person's employment status, which has been criticised for not being fit for purpose.
Seb Maley, CEO at tax insurance provider Qdos Contractor, said Kelly was the latest in a long line of hands for hire that had fallen foul of HMRC "unfairly pursuing genuine freelancers and contractors".
"This is a particularly high-profile case and shines a very unfavourable light on HMRC, that clearly has trouble interpreting the very legislation it created, attempt to enforce and insists on reforming."
Judge Dean criticised HMRC's CEST, saying: "In our view the level of control falls far substantially below the sufficient degree required to demonstrate a contract of service and we are satisfied that the factors strongly indicate that the contract was one for services."
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Dave Caplin, CEO at ContractorCalculator, said: "Time and time again we have debunked HMRC's claim that CEST is accurate and once again we have proved this to be the case."
He pointed out again that HMRC had made claims about the accuracy of the tool "without providing any formal evidence of testing... this decision clearly indicates otherwise".
"HMRC has also previously boasted that the off-payroll reforms have netted £550m, which is nearly double the amount previously forecast by the Office of Budget Responsibility," Caplin added. "Damaging and disrupting businesses by incorrectly taxing them, and extracting money which is not due, is nothing to be proud of and certainly not a sign of compliance."
Kelly's case is the fourth of five IR35 cases that HMRC has "lost" since 2018, yet the plan remains to widen the scope of IR35 to the private sector. "This judgement should be a wake-up call to government that it cannot expect businesses to understand a tax law that it cannot even implement itself," said Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed. ®