First-tier Tribunal applied flawed reasoning to question of TV presenter's IR35 status

Background

An individual's employment status for tax will determine the tax they pay. The IR35 rules target individuals who attempt to disguise their employment status by supplying services through intermediary personal service companies in order to avoid income tax and National Insurance.

In the case of HMRC v Basic Broadcasting Limited , between 2012 and 2017, the TV presenter Adrian Chiles supplied services to ITV and the BBC through his personal service company, Basic Broadcasting Ltd (BBL). HMRC issued determinations in respect of the income tax and National Insurance it said was due for tax years falling within that period. These determinations were issued on the basis that the contracts between the broadcasters and BBL fell within the scope of the IR35 legislation, and that Mr Chiles' status for IR35 purposes was that of an employee.

BBL appealed against HMRC's determinations. The First-tier Tribunal allowed the appeal and HMRC has now appealed successfully against that decision.

The hypothetical contract

The 'hypothetical contract' is key to determining whether a particular arrangement falls within the scope of the IR35 rules. The hypothetical contract is a direct contract between the worker (Mr Chiles) and the client (each of the two broadcasters). If the hypothetical contract would have been an employment contract for income tax purposes, then the rules should apply.

In order to determine whether the hypothetical contract was an employment contract, a three-stage test applies, as established in the case of Kickabout Productions Limited v HMRC:

• Stage 1: Find the terms of the actual contractual arrangements and the circumstances in which the individual worked
• Stage 2: Establish the terms of the hypothetical contract
• Stage 3: Consider whether the hypothetical contract would be a contract of employment or a contract for services

In order to reach a decision on stage 3 of the Kickabout test, it is necessary to consider whether the key indicators of employment status are present, namely:

• Whether there is mutuality of obligation between the parties and a requirement to render personal service
• Whether the client controls the work the individual performs
• If both these things are present, whether there are other factors which are inconsistent with there being an employment relationship

Reasoning

In Mr Chiles' case, mutuality of obligation and control were present. The question was whether there were other factors present that suggested the relationship would not be one of employment. In relation to this, the First-tier Tribunal had concluded that the hypothetical contract would not have been one of employment because Mr Chiles was in business on his own account and the hypothetical contracts would be seen as part of that business.

The Upper Tier Tribunal has found that the First-tier Tribunal erred in law in reaching this decision. Rather than focusing on whether Mr Chiles was in business on his own account, the First-tier Tribunal should have focused on the actual terms of the hypothetical contracts. The First-tier Tribunal should also have explored whether certain factors that may have impacted the status of the contracts were known to the broadcasters.

As the First-tier Tribunal had failed to consider the actual terms of the hypothetical contract and as this reasoning was central to its overall decision in the case, the decision was set aside and the case has been remitted to the First-tier Tribunal.

Learning points

This decision demonstrates the importance of considering all relevant factors as part of the assessment of an individual's employment status for tax purposes. We will continue to report on developments in this long-running case.

For more information or advice please contact Jessica Scott-Dye in our Employment team on 0117 314 5236, or complete the form below.