The UK's tax collector has lost its appeal against TV presenter Kaye Adams in a £124,000 IR35 case which, according to tax experts, could have implications for IT contractors.
In April 2019, Her Majesty's Revenue and Customs (HMRC) lost its IR35 case to Adams, formerly a panellist on ITV's Loose Women, who was appealing against a challenge to her self-employed status while presenting BBC Radio Scotland's The Kaye Adams Programme during the 2015/16 and 2016/17 tax years.
Although HMRC took the view she was a BBC employee, the First-Tier Tribunal tax chamber had ruled Adams' plentiful work outside the public broadcaster showed she was working as an independent contractor.
The tax authority had appealed against the ruling but that appeal has now been dismissed [PDF] by the Upper Tribunal (Tax and Chancery Chamber) for similar reasons.
According to critics of the new IR35 rules, set to come into force for the private sector at the beginning of UK.gov's next financial year (in April), freelance techies would be paid and taxed similarly to regular employees but would not get the security, benefits, and protection that goes along with permanent employment. Contractors within IR35 can be hired and fired at will and without reason.
The IR35 reforms have already discouraged many companies from hiring independent contractors employed via private service companies (PSCs) partly down to the new obligations on employers. Banks including Barclays, Lloyds, HSBC, Deutsche Bank, and RBS have all said that they would no longer hire contractors in this way because of the complex assessments to determine whether a contractor falls within IR35 rules – which would create a risk of non-compliance. BAE Systems also applied blanket determinations that put all their contractors inside IR35.
Seb Maley, CEO of tax advisor Qdos, said the Upper Tribunal ruling showed businesses there was no need to make risk-averse decisions in response to IR35 reform.
"Firms should reverse contractor bans immediately," he said. "The case also demonstrates the importance of taking all factors into account when deciding IR35 status – factors such as having multiple clients, which status can evidently hinge on."
Unlike Adams, the majority of contractors would be able to prove their self-employed status with ease, he said.
UK tax collector won't probe businesses for compliance with IR35 rules unless there's reason to suspect naughtinessREAD MORE
Earlier this month, HMRC outlined the way that the tax reforms would work and be policed when they come into effect, a year later than originally scheduled.
Despite many attempts to further delay or undo the reforms, the responsibility for assessing the employment status for tax purposes of contractors that are paid via a PSC falls to medium and large-sized employers from April.
However, HMRC said businesses would not have to pay penalties for inaccuracies in the first year relating to the off-payroll working rules, "unless there's evidence of deliberate non-compliance". It also said it would not use information acquired as a result of the changes to open a new compliance inquiry into returns for tax years before 2021 to 2022, "unless there is reason to suspect fraud or criminal behaviour".
Contractors found to be within the scope of the legislation – i.e. inside IR35 – will have to pay more tax than they might expect. The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and National Insurance contributions by billing for their services through PSCs, which are taxed at lower corporate rates.
The new rules require assessing whether the contractors meet HMRC's definition of self-employment – criticised by many techie contractors as being variable and difficult to comply with. The controversial Check Employment Status For Tax (CEST) tool provided by the taxman for the purpose has also been criticised by freelancers for giving different results at different times, being susceptible to being "gamed", and for excluding "mutuality of obligation" – the concept that the company is obliged to provide work and the contractor to accept it (which would make them more of an employee).
Critics say that being inside IR35 is essentially "no-rights employment". On the other hand, HMRC has argued that some freelancers are using self-employed tax schemes to avoid tax attracted by their on-payroll co-workers. IR35 reforms came into effect in the public sector in 2017. The government hoped the reforms would recoup £440m by bringing 20,000 contractors in line. The implementation in that area was initially described as an "utter shambles".
HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023. ®