Christa Ackroyd Media Limited v. HMRC - Stunning £400,000 Victory for HMRC Spells Anxious Times for Contractors
In the first IR35 judgment issued for 7 years the First-Tier Tribunal has decided in favour of HMRC resulting in a colossal liability for the appellant. Unsurprisingly, an examination of the facts and reasons behind the judgment illustrate once again the perils of failing to obtain competent legal advice prior to the start of an engagement. Further, the judgment exemplifies the need for equality of representation in a Tribunal hearing, notwithstanding that the facts strongly pointed towards employment.
Ms Christa Ackroyd had a long employment history with the BBC as a television presenter before providing services to via CAM Limited to BBC 1 from 2001 until termination of the Contract in 2013. Although not a lead case for a number of other similar appeals, it is part of HMRC's policy of targeting television presenters operating through personal service companies and shows a re-invigorated approach to IR35 enforcement.
Of note, HMRC declined both to interview Ms Ackroyd before expressing their initial opinion on IR35 status (para 19) and interview persons connected with the BBC who would corroborate her evidence (para 38), but her representative did not call such witnesses.
The judgment considered the key aspects of control, mutuality of obligations and substitution:
Ms Ackroyd had some influence over how Look North was presented (para 71) and a high degree of autonomy in carrying out her work (para 88), but no control over the programme itself (para 27) and the BBC retained "editorial responsibility" in line with its Editorial Guidelines. The Editorial Guidelines were evidence of an overall right of control if not contractually binding (para 108) and breach of the Editorial Guidelines were used to justify termination of the Contract (para 127). It would not have been realistic for Ms Ackroyd to breach the Editorial Guidelines without consequence.
The BBC required Ms Ackroyd to obtain their prior written consent before she could work for anyone else (paras 30 and 47) like an employee and she was not proactive in obtaining other work (para 80) to demonstrate a right to profit by sound management.
The BBC retained a right to specify what services Ms Ackroyd would provide on an ongoing basis within her "role" as a presenter. The BBC retained an ultimate right of control as a matter of contract (para 165) and to ensure compliance with the Editorial Guidelines.
Whereas there were no set hours, the requirement to work 225 days per year left little time for working for others (para 45).
Mutuality of obligations
The Contract provided for a fixed term of 7 years but could be terminated (paras 39 and 171) and the BBC retained "first call" on her services for 225 days per year (para 40). Judge Cannan cited ABC News Intercontinental Inc v Gizbert EAT (21 August 2006) (unreported) as a precedent for founding mutuality of obligations on the basis of a fixed-term contract (amongst other factors) with a minimum number of hours. Ms Ackroyd's work at the BBC was "pursuant to a highly stable, regular and continuous arrangement" (para 170).
The BBC were required to pay CAM Limited's fees even if they did not call upon Ms Ackroyd's services (paras 51 and 151) and paid regularly each year (para 56). This point was decisive in Usetech Limited (para 133).
The question of the extent to which the taxpayer is dependent on a particular client is a relevant factor (para 146) plus whether he/she can provide services to a "wider market".
Despite the drafting of the IR35 legislation the Contract excluded substitution of Ms Ackroyd. Applying Usetech Limited, the existence of an unused right to substitute is not in itself determinative of self-employment (para 142). The absence of a right to substitute was a pointer towards employment (para 168), however, substitution would have been an unrealistic proposition given the unusual fact that the BBC required Ms Ackroyd's personal services as a presenter rather than the supply of agreed services as in all other typical contracts involving personal service companies.
- Ms Ackroyd was entitled to £3,000 per year expenses allowance for "suitable clothing" (para 46).
- The fact that Ms Ackroyd received no employee benefits such as sick leave was purely a consequence of being employed by CAM Limited (para 53).
- Of significance Judge Cannan stated (obiter) that "it is not appropriate to adopt a mechanistic or 'check list' approach" but instead to take a stand back approach. It can be inferred that relying exclusively on the flawed CEST without legal advice is a recipe for disaster.
- There was little evidence of Ms Ackroyd being in business on her own account and was economically dependent" on the Contract with the BBC (para 176).
This judgment provides useful guidance for contractors, but care must be taken as the facts are not wholly applicable for the majority of contractors using personal service companies.
The IR35 legislation requires cases to be assessed on their own facts and it would be criminally negligent to disregard the statutory significance of substitution following what is, after all, a first instance judgment affecting a very narrow sector. This judgment does not create a binding precedent.
For contractors it is useful to bear in mind the following facts:
Control - consider the existence of any pervasive rights of control such as the client's policy and procedure documents. This judgment shows once again that the burden of proof is on the appellant to show that he/she is not subject to a pervasive right of supervision, direction or control. Applying Autoclenz, the contract must not contain a right of control over the contractor. The task of the representative is to prove a negative.
Mutuality of obligations - a fixed-term engagement guaranteeing a minimum number of hours provides the minimum pre-requisite for employment. Similarly, a long term engagement shows that the contractor is economically dependent on the client and is likely to be part and parcel of the client's organisation, e.g. Ms Ackroyd being on the BBC's mailing list and attending training sessions.
Substitution - is essential and the judgment cannot be relied upon given the unusual facts of the case. The BBC required a newsreader not delivery of an IT project where the identity of the individual is of lesser importance.
In summary, this judgment presents an unusual set of facts but provides a useful review of the leading judgments. This judgment illustrates plainly HMRC's hypocrisy in disregarding mutuality of obligations from its own CEST Tool but gleefully relying on Usetech Limited to persuade the Tribunal that IR35 should apply to CAM Limited.
Crucially, the conduct of CAM Limited's representatives and HMRC is a stark reminder that it is essential to (1) obtain competent legal advice prior to the start of an engagement; (2) use an experienced barrister or Queen's Counsel in conducting an appeal; (3) to confine all contact with HMRC to correspondence which can later be relied upon; and (4) do not forgo opportunities to issue witness summons - HMRC won't do you any favours.
The BBC does not emerge unscathed as it bears moral responsibility for encouraging Ms Ackroyd to use a personal service company for its own commercial advantage in the context of a contract and working practices which overwhelmingly confirm that IR35 should have applied from the outset.
If you have any questions please contact us now. We offer unrivalled quality and speed for IR35 advice, IR35 Contract Reviews, outside IR35 contract templates, representation and a wide range of other legal services.
After months of speculation the Chancellor announced the Autumn 2017 Budget including proposals for the future of IR35.
Although the Chancellor did not mention IR35 in his speech to Parliament, the government announced in the Budget Report its intention to 'carefully consult on how to tackle non-compliance in the private sector' (para 3.7).
Taken at face value it is clear that the government is not sufficiently confident of the impact of this April's reforms to IR35 in order to extend the scope to include the private sector. The period of consultation until an unspecified date in 2018 should allow bodies representing professional contractors to make their case to the Treasury.
Despite claims that 'public sector compliance is increasing as a result' (para 3.7) of the reforms affecting contractors providing services to public sector bodies, it is abundantly clear that both HMRC and the multitude of public sector bodies are unable to deal with engagements for the supply of services via limited companies on a case-by-case basis and extending such reforms to the private sector would have a disproportionate effect on the wider economy. The reforms to IR35 affecting professional contractors providing services to the public sector have damaged the NHS in particular and have caused a rapidly worsening skills crisis. The NHS adopted a blanket policy to IR35 status and it is not inconceivable that a risk averse end-user will adopt the same approach.
HMRC's CEST tool for assessing IR35 status has been shown to produce grossly inaccurate results and it is clear that continued use of the tool will expose HMRC to accusation of promoting tax avoidance. As reported elsewhere, and confirmed by The Law Place Limited's independent tests, an employment status tool which deliberately excludes mutuality of obligations (part of the trinity of tests for employment status) cannot be relied upon.
Act now to stop this proposal
However, as the government has not yet decided upon extending the toxic IR35 reforms to the private sector it is possible to oppose and hopefully derail this proposal. After all, expecting different (or better) results from the same policy is hardly rational.
We are working in conjunction with Contractor Calculator, the UK's leading representative body for professional contractors, to oppose extending last April's IR35 reforms to the private sector and will lobby the government on your behalf.
In addition, the government announced plans to publish a discussion paper on employment status. Whilst a discussion paper is likely to wait until the Supreme Court has handed down judgment in respect of Uber and others, creating a new category of 'dependent contractor' would require substantial legislative changes at a time when Parliament's time is monopolised by withdrawal from the European Union.
Other announcements of interest include increasing the personal allowance to £11,850. However, at para 3.88 the government announced investing a further £155 million in HMRC indicating a renewed intention to take IR35 seriously.
If you have any questions about the impact of the Budget please call on 07788 773871 (24 hours) or complete the form below.
Today the Chancellor of the Exchequer, Mr George Osborne MP, announced the 2015 Budget.
As widely expected the Chancellor did not announce any plans to amend or repeal IR35. However, a series of anti-avoidance measures were announced which are of relevance to limited company contractors, especially those who claim tax relief on travel and subsistence.
Travel and subsistence allowance
The Chancellor announced that the conclusion of the review initiated in the Autumn Statement 2014 into the practice of allowing temporary workers under an umbrella contract to claim 'home to work' travelling and subsistence allowance. This allowance is not available to employees. Although the precise details are not available and will be published in April 2015, it is clear that umbrella workers and limited company contractors who are under the supervision, direction and control of the end-user will henceforth no longer be able to claim travel and subsistence allowance for temporary work places. This is likely to be seen as a politically motivated measure, undermine flexibility and create uncertainty in the labour market.
This does not affect genuinely self-employed contractors and further analysis of the new rules will be published here. The risk involved for limited company contractors is uncertainty as to whether an engagement genuinely constitutes self-employment and whether HM Revenue & Customs can reclaim with interest incorrectly claimed expense and subsistence allowances. It is therefore imperative to resolve questions regarding employment status before the start of an engagement to mitigate such risks. It is likely that a limited company contractor who is outside IR35 will not be affected by the new rules.
Capital Gains Tax
The government will impose measures to ensure that 'entrepreneurs' relief on the disposal of personal assets used in a business is only available when someone is making a meaningful withdrawal from that business.' Entrepreneurs' Relief will now be restricted to disposals of at least 5% of a company's shares. This is relevance to limited company contractors who plan to sell their businesses entirely or shares in their companies.
Please contact us if you have any questions.
In our inaugural HR newsletter we will focus on the various types of recruitment solutions available to HR professionals. This guide is intended to provide a brief overview and is not a substitute for legal advice. References to 'client' means an organisation, as represented by its HR function, which has instructed either an employment agency or employment business to provide an outsourced recruitment service. It is beyond the scope of this article to comment on Swedish derogation/regulation 10 models.
Recruiters fall into two main categories:
An employment agency's role is to source, select and introduce a candidate to its client. The client will employ the successful candidate directly (i.e. a contract of services) either on a fixed term or permanent basis and will be responsible for all duties as an employer including but not limited to pay, tax, etc. The employment business would be expected to check candidates' identity and right to work therefore reducing the administrative burden for HR.
A common problem facing recruiters is what to do when the newly appointed candidate proves to be unsuitable. At this point it is worth checking the contract with the employment agency to ascertain if a refund of the introduction fee is possible and the timeframe involved. Normally contracts exclude refunds if the cause is redundancy so any decision to recruit must be taken carefully in line with the organisation's strategy.
An employment agency usually charges a fee based on a percentage of the successful candidate's annualised salary, often 25% or more. If an HR manager already knows the candidate socially or from previous employment it would be tempting to employ the candidate directly without recourse to the employment agency. This is a common problem in recruitment and the key is whether the introduction is the effective cause of the engagement. In the event of a dispute the court will examine whether the client would have been aware of the candidate without the efforts of the employment agency and the risk facing HR is payment of the introduction fee as damages plus the employment agency's costs as assessed.
An employment business' role is to supply agency workers (as defined in regulation 3 of the Agency Worker Regulations 2010) to clients on a temporary basis. An agency worker is not employed by the client and is engaged on a contract for services with the employment business. In addition, an agency worker will, like an employee, remain under the supervision, direction and control of the client. The employment business will be responsible for paying the agency worker the minimum wage, ensuring there are no unlawful deductions from wages and the correct level of paid holiday entitlement. HR needs to ensure that the agency worker receives the minimum rest breaks, works no longer than 48 hours per week in the absence of an opt-out, is not subject to unlawful discrimination (race, religion, etc) and can make protected disclosures (whistleblowing) without suffering detriment.
At this point it is important to distinguish between an employee and a worker. From an HR perspective using an agency worker provides flexibility as agency workers cannot claim unfair dismissal (section 98 Employment Rights Act 1996 applies only to employees) if an assignment is terminated. Normally, contracts with employment businesses allow an assignment to be terminated immediately without the requirement to give paid notice. For more information about the definition of an employee and a worker please see the CIPD's discussion here, but for convenience the second limb of the definition given by section 230 (3) Employment Rights Act 1996 is used for this article. There are potential risks of an agency worker challenging his/her employment status in order to claim employment rights but HR should seek advice to verify that the contract excludes any mutuality of obligation and provides an appropriate right of control, i.e. James v Greenwich. As mentioned above, an agency worker can bring a claim against a client for discrimination so HR must ensure that policies affecting discrimination are up to date.
The Agency Worker Regulations 2010 must be considered by HR when engaging agency workers. Agency workers are entitled to 'day one' rights such as access to a crèche facilities and information about permanent employment. After 12 weeks in the same assignment agency workers become automatically entitled to the same basic terms and conditions of employment as if employed directly by the client with reference to a comparable employee. The Regulations entitle the agency worker to bring a claim against the client in various circumstances so HR must take great care to ensure that processes are in place to monitor treatment of agency workers and look for comparative employees when an agency worker has completed 12 weeks of an assignment. The Regulations contain detailed anti-avoidance measures so re-engaging an agency worker to do substantively the same work does not stop the clock ticking.
The Regulations do not apply where a self-employed limited company contractor is supplied by the employment business. The 'IR35' legislation applies where an 'intermediary' (i.e. a company or partnership) is used in the supply chain and HR needs to carefully negotiate a contract for the supply of a limited company contractor to ensure that the contract with the employment business accurately reflects the anticipated working practices. Time and again HR staff and recruiters fall into the mistake of conflating a job title with the services provided by self-employed limited company contractors. It is recommended that legal advice is sought when amending contracts in any event to avoid costly mistakes and inevitable disputes. Although the IR35 legislation affects limited company contractors only (to the extent that extra employment tax may be payable by the limited company contractor), HR may be required to give evidence in the Tax Tribunal regarding the working practices of such an engagement. In addition, a client may become liable for employment tax if it gives fraudulent information concerning working practices so care must be taken when faced with requests to sign statements confirming working practices.
Using agency workers is very often costly and may only provide a short-term solution to a temporary requirement. As widely reported the NHS is currently reviewing its practices for engaging agency workers. Whereas an employment agency is paid only once for successfully introducing a candidate an employment business will submit a regular invoices per worker supplied. An invoice will include the minimum wage (or higher), holiday pay at 12.07% for each hour worked (not paid on a 'rolled up' basis), the margin and finally VAT (following Reed Employment Limited v HMRC) which can be applied to the margin only. When requested to reduce costs HR may seek to employ an agency worker directly but contracts for the supply of agency workers often include 'temp to perm' transfer fees so such a stratagem may prove to be a false economy. Nevertheless, contractual provisions which purportedly entitle an employment business to charge an introduction fee in the same manner as an employment agency in order to circumvent regulation 10 of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 are likely to be unenforceable and unlawful.
In conclusion, if an organisation's HR function is provided with specialist advice and training in recruitment law it can operate on a level playing field with recruiters and secure the best talent at minimum commercial risk. If you would like to discuss this article in more detail please contact Martyn Valentine, director of The Law Place Limited, for a no-obligation 15 minute consultation to find out about our employment relations services and contract templates.
The Law Place Limited is looking for CIPD students to help with articles - contact us now.
©The Law Place Limited, 2015, all rights reserved.
Today George Osborne MP delivered the second Budget of 2015.
The Chancellor said that 'economic security' is at heart of the Budget and will raise £5bn from tax evasion/avoidance measures including, ominously, an intention to target directors who are the sole employee of their company.
Once again personal service companies, i.e. limited company contractors, are under scrutiny: 'We're consulting today on how to deal with the increasing abuse of the rules around disguised employment when working through a personal service company.' We will keep you informed of this consultation process. At paragraph 2.183 of the Summer Budget Report yet another consultation process in respect of IR35 has been announced but anyone hoping for abolition will be disappointed.
Following on from the March 2015 Budget the Chancellor confirmed at paragraph 2.182 of the Summer Budget Report (but not in the speech before the Commons) that detailed proposals will be made for restricting expenses and travel allowance for umbrella workers.
Of significance to limited company contractors the Chancellor promised new funds for HM Revenue & Customs to raise additional funds by targeting anti-avoidance measures. This has been promised before but limited company contractors should be aware that complacency is no longer an option regarding potential IR35 liability.
The Chancellor also promised to remove permanent non-domiciled status. Any taxpayer in the UK for 15 of the previous 20 years will be liable for UK tax for income earned anywhere in the world. This may affect limited company contractors who frequently work outside the UK.
Reforms were announced in Corporation Tax; whereas CT will fall to 19 per cent in 2017, payment dates will be brought forward in line with other countries.
Of potentially greater significance the Chancellor announced plans to overhaul tax on dividends. There will be a tax free allowance of £5,000 but tax on dividends will increase. This is, of course, the principal tax saving gained by operating through a limited company and may have a significant effect on limited company contractors irrespective of any direct reforms to IR35. The Chancellor confirmed (at paragraph 1.188) that 'those who receive significant dividend income - for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company - will pay more.' A close company means a company which is privately owned and controlled and has five or fewer participants - so the typical limited company contractor where the only director is also the majority shareholder will be affected.
In respect of income tax the lower rate threshold will increase to £11,000 and the higher rate threshold will increase to £43,000.
Please contact us if you have any questions.
Today, 17/7/15, the Treasury published the Intermediaries Legislation (IR35): discussion document following the Budget of 8/7/15. The discussion document is remarkably scant on detail of the Treasury's own ideas on reforming the operation of the IR35 legislation so we'll help.
We do not accept that the law creates excessive grey areas or is over-complex. The common threads running through all judgments which held that the engagement under review was outside IR35 are the existence of an overall project basis, independence on the part of the PSC's representative to determine how, when and where to do the work, a commercially enforceable right to substitute the representative and evidence of being in business such as gaining income from other clients and exposure to commercial risk. The existing law, both statute and judgments, is clear but administrative reform based on common sense will produce better results than hitherto.
Therefore, a legally binding statutory declaration (i.e. enacted by legislation and set out in a prescribed form) signed by both the PSC and end-client before the start of an engagement could be used to provide evidence of mutuality of obligations, whether a right of control over the PSC and its representative exists (see above) and whether the end-client would accept substitution and the use of subcontractors. The statutory declaration would provide a thorough questionnaire to focus the parties' minds on the true working practices (which have primacy over the terms) and provide a warning of penalties if incorrect or dishonest information is provided, possibly including liability for HM Revenue & Customs' costs.
Further, the statutory declaration would need to clarify whether there are any restrictions upon the PSC in providing services to other clients during the currency of the engagement. A much more nuanced definition of control than the control test in respect of umbrella workers and their entitlement to tax relief on expenses would be set out in the statutory declaration and cover the areas above. Additionally, the statutory declaration would ask whether the engagement could have been obtained without the help of a recruiter and if independent legal advice has been sought regarding the contract. After all, a PSC which uses its own terms and looks for work independently is more likely to be in business on its own account than a PSC which relies on recruiters, notwithstanding the existence of a master-vendor arrangement between a recruiter and an end-client.
The same statutory declaration would also help to clarify whether the worker should be entitled to rights under regulation 3 (2) (b) of the Agency Worker Regulations 2010. This would provide much needed certainty for both recruiters and end-clients. In essence, if the statutory declaration confirms that there is no project basis to the engagement then it will serve as confirmation that the Agency Worker Regulations 2010 apply to the engagement.
The sting of the proposed statutory declaration is that fixed term engagements where the PSC's representative is expected to fill a role (evidenced by advertisements published by the end-client and/or recruiters and the draft agreements) and be part of the end-client's 'business as usual' operation will automatically be caught by IR35. The Treasury provided an example of how two lawyers, both undertaking substantially the same work, could face markedly different tax liabilities. The lawyer operating through a PSC would, of course, pay much less tax than the lawyer employed on a contract of services.
Where the PSC's representative is undertaking a defined role within the end-client's business then the option of receiving a tax advantage by the use of dividends should not be available and the end-client or recruiter will be required to deduct PAYE and NICs at source. Many PSCs fall into this category of 'super temp' and would be caught if this proposal is enacted. This can be accomplished by a Finance Act rather than modifying the IR35 legislation (section 49 (1) (a) - (c) Income Tax (Earnings and Pensions) Act 2003) directly thereby circumventing previous objections to reform. The concept is simply to make PSCs and end-clients acutely aware of the need to crystallise the working practices at the outset rather than to complacently hope for the best. This complacency is not helped by HM Revenue & Customs' lack of aggression in conducting inquiries.
Historically, the main reason for the continued pressure from the Treasury upon PSCs is insufficient training for both recruitment consultants and HR practitioners. Unfortunately, many in house drafted contracts for the supply of PSCs to end-clients are not fit for purpose and require substantial re-writing by the PSC's representative to properly reflect the true working practices. Common industry mistakes include defining the services as a job title as a matter of standard practice in a contract which is purportedly for use by self-employed PSCs. Therefore, updated guidance from HM Revenue & Customs and other stakeholders would provide greater certainty for PSCs and end-clients, especially for the benefit end-clients' HR staff who may not be aware of employment status. The key question is whether or not the work involves providing a commercial service, i.e. delivery of a time-sensitive project, which is outside of an end-client's normal functions. If there isn't a project then the other tests are academic.
Please contact us if you have any questions.
© Copyright The Law Place Limited 2015, all rights reserved.
In the Budget of 8/7/15 the Chancellor announced a consultation on tax relief for travel and subsistence which has been published here.
The proposal to remove tax relief for travelling costs for limited company contractors and umbrella workers will only affect those 'subject to (or to the right of) the supervision, direction or control of any person' and is broadly in line with the Chancellor's stated intention in the March Budget.
This will clearly not apply to limited company contractors who are operating outside IR35 and underscores again the importance of receiving clear legal advice at the outset rather than taking the risk of uncertainty regarding the vague test of control which copies the amended section 44 (2) ITEPA 2003. Control is only one of the tests to determine IR35 status but the legal position is in our view clear cut - if you are under control like an employee then you will no longer be able to claim tax relief on travelling expenses. End clients will need to be consulted prior to the start of an engagement to determine what degree of control, if any, they expect to exercise over a worker. Vigilance is needed as cases confirm that working practices can change over time.
Workers will not be able to claim tax relief for ordinary commuting but can continue to claim tax relief when travelling between client's sites in line with employees under a contract of services.
Please contact us for more information.