6th April 2023
Within just one week, there have been two judgements relating to the application of the intermediaries legislation (commonly referred to as IR35) involving high profile personalities – Gary Lineker and Eamonn Holmes. It should be noted that while both appeals dealt with IR35, only Mr Holmes’ case reviewed the employment relationship between him and ITV.
Mr Lineker’s appeal was successful due to a technical argument that he contracted directly with BBC and BT, rather than through his partnership vehicle, so IR35 does not apply. His working relationship with either organization was not further reviewed.
Upper Tribunal ruling
In its decision, published on 29 March 2023, the Upper Tribunal confirmed that Mr Holmes’ work for ITV was within IR35. During the pre-April 2021 period, the responsibility to operate Pay As You Earn (PAYE) was with his Personal Services Company (PSC), not ITV.
This judgement can be better understood by looking at why IR35 was introduced, and what criteria must be met for it to be applicable.
People working via a PSC, especially IT workers, was prevalent during the 1990s. PSC structures provided Income Tax and National Insurance (NI) benefits. However, HMRC were becoming increasingly concerned that if the PSC was removed, the working relationship between the end user/engager and the worker was one of employment.
The IR35 legislation was introduced in 2000 with the stated goal of requiring workers to pay the same amount of Income Tax and NI as employees, regardless of the structure in place. It was up to the PSC/intermediary to review the contractual terms of the engagement and determine whether the contract fell within (employment) or outside (self-employment) of IR35. If the contract falls within IR35, the PSC was required to operate PAYE.
In 2017 and 2001, changes were introduced to the legislation for public entities and the private sector respectively, which meant the responsibility for the employment status review was transferred from the PSC to the end client. If the contract falls within IR35, the fee payer (the entity that contacts the PSC) must operate PAYE. There is currently an exemption for small employers in the private sector, where responsibility for the review and if applicable, operation of PAYE still sits with the PSC and not the small end client
The key provisions are set out in Section 49 Income Tax (Earnings & Pensions) Act (ITEPA) 2003:
- This chapter applies where:
(a) An individual (‘the worker’) personally performs, or is under an obligation personally to perform, services for another person (‘the client’),
(b) The services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (‘the Intermediary’), and
(c) The circumstances are such that if the services were provided under a contract directly between the client and the worker, the worker would be regarded for Income Tax and NI as an employee of the client.
In IR35 cases, (a) and (b) are given and it is (c) that is debated in the courts. However, in Mr Lineker’s case, the Judge opined that the contracts were directly between Mr Lineker and the BBC/BT, and not involving a third party. Consequently, IR35 does not apply.
The case was first heard in June 2018 and the current appeal was to decide whether Mr Holmes’ contract with ITV, for the period 2011/12 and 2014/15, was inside or outside IR35. There is a set process which is followed in any IR35/employment status review and this is to:
- Review the contractual terms of the engagement.
- Determine how the worker and the client work this contract in practice.
- Form a hypothetical contract of the actual working terms.
- Subject the hypothetical contract to the employment status indicators established by case law to determine if the contract is an employment or self-employed contract.
The employment status factors include:
- Control – what, when, where and how the task is performed
- Provision of personal service – for example, does the worker have to perform the task himself or can he use a substitute?
- Mutuality of obligation – does the client have to offer the work, and if so, does the worker have to accept the work?
- Provision of equipment: HMRC only considers equipment to be significant when it is fundamental to the service provided and sufficiently important to affect the substance of the contract
- Financial risk: can the worker make a profit or loss?
- Part and parcel of the client: for example, how well is the worker integrated into the organisation?
Other factors concern the termination notice, payment of any benefits, intention of the parties, length of the contract and demonstrating a business on their own account.
Certain factors carry more weight than others, but both HMRC and the courts state that the employment status should be multifactorial. This has been emphasised again in recent cases involving, Kaye Adams, Adrian Childs and Stuart Barnes.
Factors that determined the Upper Tribunal’s ruling
The three limbs of the Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance  2QB497 case were satisfied, since there was sufficient framework of control exercised by ITV, there was mutuality of obligation and Mr Holmes had to personally provide his services.
In contrast to recent cases cited above, where being in business on one’s own account carried the most weight, the Judges in Holmes’ case opined that ‘it may seem that Mr Holmes’ work for several organisations points to him being in business on his own account, i.e. self-employed in all of his work. However, the case law clearly establishes that an individual may be considered under several contracts of employment, each accounting for a different period of his or her working week and be self-employed for other contracts.’
Takeaways from the Lineker and Holmes cases
- HMRC struggles to understand its own legislation.
- The Judges seem to make different decisions based on similar circumstances.
- It is important to keep up with case law.
The above and recent cases demonstrate that it is imperative to have robust processes, controls, and governance in place to ensure correct employment status of your off-payroll workers.
Please contact the employment taxes team should you have any questions.