HMRC victorious in first IR35 decision in seven years as it clamps down on ‘bogus’ self-employment


Blick Rothenberg partner, Gary Gardner, comments on the recent tribunal decision on Christa Ackroyd Media Ltd, an important decision on the use of Personal Service Companies (PSCs) and the so called ‘IR35’ rules.

HMRC has won an employment status case against the former BBC presenter and it’s the first IR35 ruling in over seven years. This was a decision by the First-tier Tax Tribunal and therefore not a binding precedent, but it is nonetheless a well-reasoned decision based on the facts and, as the tribunal noted, it is not a lead case and “one of a number of other appeals involving TV presenters.” The decision will mean others operating similar arrangements through a PSC feel pressurised and may wish to review their circumstances and seek advice as to whether to continue with their appeals or reach a settlement with HMRC.

The PSCs appeal was dismissed in principle meaning that there is no agreement between the parties as to the amount of tax and NIC the company will have to pay HMRC. If agreement cannot be reached the tribunal may be called upon to determine the quantum of tax and NIC owed by Christa Ackroyd Services Ltd.

Employment status for tax purposes and the question of employed v self-employed has long been a fault line in UK tax legislation. There is no statutory definition of employment or self-employment but a myriad of decisions in the tribunals and higher Courts have established so called ‘status tests’ which act as pointers as to whether particular arrangements constitute a ‘contract of services’ (employment) or a ‘contract for services’ (self-employment). It is the status tests that need to be considered very carefully by those who would seek to engage a worker on a self-employed basis. 

For many years PSCs have been used in order to frustrate any challenge from HMRC, as the law is very clear that there cannot be an employment when a company contracts or engages with another company for the provision of services. The Government’s response was to introduce the intermediaries legislation or IR35 to prevent workers from setting up limited companies to avoid being treated as an employee. In simple terms, HMRC look to see if there is a hypothetical contract in place between the end-user client and the worker leading to disguised employment or bogus self-employment.

Arguably many engagers took advantage of their contractors by requiring the use of PSCs knowing that in the event of a successful challenge by HMRC the tax risk fell on the PSC not the engager or employer. This was a win-win situation for engagers driven by the significant NIC savings and reduction in the overall costs of engaging a worker and has led to an a marked increase in the number of PSCs. It is clear from this case that the BBC actively encouraged Ms Ackroyd to engage through a PSC.

Contractors needed to be alert to the fact that it is their responsibility to decide whether or not the IR35 rules applies to their circumstances. However new rules were introduced in April 2017 for the public sector only (including the BBC) which made public sector engagers liable for the PAYE and NIC due by the PSC.

An HMRC consultation is expected to be released this year which will propose the extension of these new rules to the private sector. It is envisaged that this will have a impact far greater than that in the public sector. To avoid uncertainty and potential chaos for private businesses and contractors it is hoped there will be a reasonable transition period so the government can learn from the implementation of the rules in the public sector. 
Making the engager, whether in the public or private sector, liable for the tax when IR35 is in point will undoubtedly discourage the use of PSCs and is likely to lead to a more considered approach to engaging contractors who may themselves feel it is better to be engaged as an employee in order to enjoy the other benefits and protections employment provides.

This is therefore an important victory for HMRC in its ongoing clampdown on ‘bogus’ self-employment.

For more information on the decision, click here.

For more information on the article, please contact Gary Gardner.