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How to Properly Analyse Employee Status for Tax Purposes

on Friday, 13 May 2022.

In two recent decisions, the Court of Appeal has emphasised the need to look beyond mutuality and control when determining employee status for tax purposes.

What Is IR35?

IR35 is a set of rules that apply to contractors who provide services to a client through an intermediary (often a personal service company, or PSC), but who would be classed as employees if they were contracted directly. The rules operate to ensure these individuals pay the same income tax and National Insurance contributions as employees.

Why Does Employment Status Matter?

In order to establish whether the IR35 rules should be applied, the court will need to consider the employment status of the individual concerned. It is important to highlight that in the context of employment status for tax purposes, an individual will either be employed or self-employed. Unlike where employment status is considered in the context of employment rights cases (such as holiday pay claims), there is no hybrid 'worker' status that can be applied here. It is also possible for somebody to be classed as self-employed for tax purposes even if they have a different status in employment law. To assist organisations with determining the tax status of an individual, HMRC has developed a Check Employment Status for Tax tool.

What Was the Significance of the Two Cases in Relation to IR35?

The Court of Appeal recently handed down decisions in two cases relating to IR35:

  • Atholl House Productions Limited v HMRC, where a presenter provided services for the BBC and other media organisations through her PSC. The relationship was governed by two contacts. The presenter had a minimum commitment of 160 programmes and a minimum contract fee. She was not required to work exclusively with the BBC but the BBC had first call. She was prevented from appearing in other broadcast media intended for a UK or Irish audience without consent; and
  • Kickabout Productions Limited v HMRC, where the presenter provided services via his PSC (Kickabout) to Talksport Limited. The services were provided under the terms of two written contracts for services. The presenter was free to provide services to entities other than radio broadcasters. The presenter was required to present the shows at the times, days and locations dictated by the station, and the station could edit, delete or transmit any part of the show.

In both cases, HMRC thought the IR35 rules should apply. It thought there was an employment relationship in place in both cases.

Were the Contracts Consistent with Employment?

Both cases made their way up through the First Tier and Upper Tribunals. In Atholl House, HMRC was appealing against the decision of the Upper Tribunal that the contract was not consistent with employment. The Court of Appeal allowed the appeal and the case has been remitted to the Upper Tribunal. In Kickabout, the Court of Appeal upheld the Upper Tribunal's decision that there was a contract of employment.

What Was the Reasoning?

The Court of Appeal confirmed the correct approach to IR35 cases is to:

  • consider the written contracts in place
  • compare the contracts to the reality of the relationship between the parties, and construct a hypothetical contract between the client of the PSC and the individual
  • determine whether the hypothetical contract is a contract of employment, or a self-employed contract

In order to analyse the hypothetical contract, the court must consider the following three questions:

  • Is there mutuality of obligation between the parties and a requirement to render personal service?
  • Does the client control the work the individual performs?
  • If both these are present, are there other factors which are inconsistent with there being an employment relationship?

Importantly, the Court of Appeal has confirmed that finding there is mutuality of obligation and control does not create a presumption that a contract of employment exists. The court must consider all relevant factors before reaching a conclusion.


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What Does This Mean for Employers?

These two decisions emphasise the importance of considering all relevant factors in order to ascertain whether an employment relationship exists between two parties. It is not sufficient to consider mutuality of obligation and control alone. In future, IR35 cases are likely to focus more on the third element of the test, ie whether there are any other factors present which are inconsistent with an employment relationship.

For more information on employment status and IR35, please contact Bob Fahy in our Employment team on 07500 686163, or complete the form below.

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