IR35 developments: Kaye Adams wins long running IR35 battle against HMRC
In this article, we revisit a dispute that we reported on previously after an important First-Tier Tribunal (FTT) decision released on 29 November 2023. The dispute was over whether the intermediaries legislation (IR35) applied to arrangements entered into between Atholl House Productions Ltd (the taxpayer) and the BBC for the services of Ms Kaye Adams. The taxpayer here was a personal service company, through which Ms Adams provided her services in delivering The Kaye Adams Programme on BBC Radio Scotland.
Under IR35, where services are provided from a worker (Ms Adams) to an end-client (the BBC) through an intermediary (the taxpayer), a hypothetical contract between the worker and the end-client needs imposing. It is then considered whether this hypothetical contract is one of employment or one of self-employment. If the hypothetical contract is one of employment, IR35 can apply and additional tax liabilities are usually imposed on the intermediary.
Case history
The case was initially heard in the FTT and the Upper Tribunal (UT), with both tribunals finding that IR35 did not apply. Although the Court of Appeal in 2022 found that both the FTT and UT had made errors of law, it was not appropriate for them to remake the decision. The CA remitted the case back to the UT to be reheard in light of the CA’s legal guidance on key issues. Various procedural disputes followed, which resulted in the taxpayer being allowed to adduce further evidence and the case was therefore to be reheard by the FTT instead of the UT.
Tribunal decision
This case ultimately rested on the employment status test used to determine whether an employment relationship exists. The test has three limbs in that there must be mutuality of obligations, a degree of control over the worker, and the other terms of the contract must be consistent with it being an employment contract.
While the FTT considered that the existence of both mutuality of obligations and control had already been decided by the UT and CA in the previous hearings, the FTT did further accentuate this in their decision. On mutuality of obligation, the FTT considered that the BBC was generally obliged to provide Ms Adams with work and Ms Adams was, in turn, generally obliged to accept that work. As to control, the FTT was satisfied that the BBC had sufficient control, albeit in some regards modest, over “what”, “where”, “when” and “how” Ms Adams provided services to the BBC.
Although the FTT found that the first two limbs of the employment status test were satisfied, the decision would turn on the critical third limb. This considers whether, in light of the hypothetical contract as a whole and the wider circumstances, the arrangements were reflective of an employment relationship. Taking the terms of the hypothetical contract, the relationship between Ms Adams and the BBC appeared to be one of employment. However, the FTT noted that, while these terms were “central to the enquiry”, they were not the full picture. The factors pointing towards self-employment slightly outweighed those pointing towards employment. As a result, the FTT decided that the arrangements in question were outside IR35 and the taxpayer’s appeal was upheld.
Moore Kingston Smith comment
The issues in this appeal are clearly “difficult” and “finely balanced”, as the FTT expressed on several occasions. It is particularly interesting that the FTT found that there was sufficient mutuality of obligations and control, while the terms of the hypothetical contract also pointed towards employment. It was only when the surrounding circumstances were taken into account that the scale tipped towards self-employment. This case shows the difficulties that taxpayers, HMRC and even the tribunals face in applying the IR35 provisions.
While judicial precedent continues to mount on the application of the employment status test to IR35 arrangements, there are wider questions around whether the current approach and test are workable in practice. Tribunals are first given the difficult task of ascertaining the terms of the hypothetical contract. The complexity then compounds when it comes to applying the employment status test to that hypothetical contract. It is no surprise that there is such a large backlog of disputes in the tax tribunals.
While it remains to be seen whether HMRC will appeal this decision, HMRC may decide to focus on other IR35 appeals currently in the tax tribunals. However, given how finely balanced the issues are and the perceived importance of this case following the CA’s guidance on key legal issues in 2022, HMRC may want to continue pursuing a positive result.
If you are subject to IR35 risk or otherwise need to navigate this complex area, please contact our employment tax experts to explore how we can assist you.