What now for IR35?
A recap of the rules
Ronan Keating sang ‘Life is a Rollercoaster’ back in the year 2000. It could be argued that the song title accurately reflects the trials and tribulations of the IR35 legislation that was initially established in 1999.
The IR35 rules aim to stop individuals from avoiding tax and NICs by supplying their services to clients through an intermediary, typically a limited company. HMRC can deem such people as ‘disguised employees’ contending that they look and act like employees and seek to counter the services being delivered via a limited company where payroll taxes (especially employer national insurance contributions) are avoided.
So, although an individual can supply services via a limited company to a third party, if the way in which the services provided are akin to an employment relationship, the individual will have to pay income tax and national insurance contributions as if they were an employee.
In 2017 for the public sector and extended to the private sector in 2021 for medium/large organisations, the rules were changed requiring the person receiving the individual’s services to determine whether a deemed employment relationship exists. This is known as off-payroll working.
HMRC tests
HMRC can raise an enquiry notice at any time. Where the contractual arrangements differ from the actual working arrangements, HMRC will consider instead the hypothetical contract between the contractor and the business. This is done by considering the employment status indicators arrived at by the Courts. These include:
- Control – how much power does the business have over what, how, when and where the contractor completes the assignment? The more control, the more a deemed employment relationship exists.
- Substitution – can someone else complete the assignment or is it contractor and person specific? Again, if the situation is person specific, it is more likely to be a deemed employment relationship.
- Mutuality of obligation (MOO) – is the business obligated to provide work and must the contractor accept it? If the answers are yes, then it’s likely the arrangements are within IR35.
Land of confusion
As mentioned above, there have been several reforms to the IR35 legislation, the latest of which extended the reach from the public sector to include the private sector in 2021, as well as placing the onus to determine whether IR35 played a part on the business contracting the services, rather than on the contractor themselves.
The use of the well-known Genesis song in the sub-title is appropriate given events of the recent past. The ex-Chancellor, Kwasi Kwarteng, announced in the government’s mini-budget in September 2022, that IR35 would be scrapped from 6 April 2023. Many taxpayers and their advisors exhaled a huge sigh of relief, but this was short-lived. On Monday October 17 2022, the repeal of the Off-Payroll Working rules had been reversed from announcements made by the new Chancellor Jeremy Hunt.
Having already U-turned on the plan to shelve next year’s corporation tax hike, along with the abolition of the removal of the 45p income tax rate, Mr Hunt confirmed contractors’ worst fears that the off-payroll rules of 2017 and 2021 will remain in place.
Recent cases involving sport
The Off-Payroll Working and IR35 legislation does not just apply to IT and other contractors. HMRC has taken several IR35 themed cases over the last few years involving ex-professional sportspeople and others in the sports sector.
The former England Rugby player turned Sky Sports pundit Stuart Barnes won a first-tier tax tribunal appeal over a reported £695,000 tax liability bill levelled against him by HMRC. Mr Barnes provided his services to Sky between 2013 and 2019 through his company S&L Barnes Limited.
The judgement of the tribunal, published in January 2023, ruled that IR35 did not apply to Mr Barnes, meaning the Sky Sports pundit will not have to pay the sizeable tax bill to HMRC. Mr Barnes’ appeal was granted on the basis that he was in ‘business on his own account’. Between 2013 and 2019, Mr Barnes' income from Sky made up anywhere between 33% and 61% of the income received by S&L Barnes Limited.
"The most compelling indicator is that the appellant’s [Barnes] contract with Sky was but one part of the brand, and contributed on average 60% of the appellant’s income, while over £150,000 on average would also be earned from other clients," the tribunal read. "Sky knew Barnes was in business on his own account and worked for other broadcasters. Sky welcomed that fact and wanted the world’s best commentator for the coverage.”
"The second compelling indicator is the degree of autonomy Mr Barnes had in relation to how he fulfilled his role as a commentator for Sky Sports coverage."
A mixed set of results
It is believed that Mr Barnes’ victory (for now at least, as we await news of whether HMRC will appeal the first-tier tribunal’s decision) is one the exceptions since it is understood HMRC has won more than 80% of employment status and off payroll appeals heard by the tribunals and the courts since the start of 2020.
Fellow former professional rugby player, Michael Lynagh, had his application for an appeal rejected recently, leaving him with a £230,000 tax and national insurance bill for breaching IR35 rules.
Previously, Sports presenter Alan Parry lost his appeal against HMRC, leaving him with a £356,000 tax bill.
Similarly, Talksport host Paul Hawksbee lost his appeal, resulting in a reported £140,000 IR35 settlement with HMRC.
Contrastingly, TV and radio presenter Adrian Chiles won a seven-year long IR35 case to the tune of £1.7 million against HMRC. Additionally, Lorraine Kelly won her £1.2m case as the Courts ruled amongst others that presents herself as a ‘brand’.
Given HMRC’s obvious interest in this area and the fact that the rules will not be abolished from April 2023, taking advice before business arrangements are made is essential.
How Crowe can help
For more information on the issues discussed in this article or to discuss your individual circumstances, get in touch with Peter Fairchild or your usual Crowe contact.
