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HMRC wins in Upper Tribunal on IR35

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In advance of the upcoming changes to the IR35 rules, there are a number of cases progressing through the tribunal system assessing the position under the current law. To date these have all been heard by the First-tier Tribunal (FTT) – decisions of which, although persuasive, are not legally binding. The first case to reach the Upper Tribunal (UT) is the case involving Christa Ackroyd’s personal service company (PSC) (see Christa Ackroyd Media v HMRC [2019] UKUT 326, reported in Tax Journal, 31 October 2019).

To recap, the test for whether IR35 applies is whether the individual would be an employee if they were directly engaged. Where that test is met, under the current rules the PSC is obliged to operate PAYE and pay NICs. This hypothetical employment test will still apply under the new rules, although the implications will be different. Therefore, whilst companies may not be directly impacted by the findings in the cases now, they are useful for assessing the position from 6 April 2020.

The UT has upheld the decision of the FTT in favour of HMRC. The test as to whether an individual would be an employee is fact specific and depends on multiple factors (none of which are determinative). The appeal before the UT focused on the single factor of control. The PSC argued that there was insufficient control for a hypothetical employment relationship to exist, both because the contract between the BBC and the PSC did not contain a clause on control and the control exercised by the BBC in practice was limited.

The UT made the following points about the test for control:

  • The reason for exercising the control is not relevant. For example, if control is exercised for regulatory reasons, this cannot be excluded.
  • The question is whether as a matter of contractual construction, the BBC had ultimate control over Ms Ackroyd, rather than formally considering whether control was an implied term (which has a specific threshold). 
  • Control means ultimate control in how work is performed and not day-to-day control or actual supervision. In essence, could the BBC control Ms Ackroyd, rather than would the BBC control Ms Ackroyd. The UT rejected the argument that there was a distinction between control of Ms Ackroyd’s input and control of the output.
  • In order for control to exist, there does not need to be granular mechanics of control, i.e. the lack of formal appraisal or line manager does not preclude control from existing.
  • The test is objective and so does not take into account the subjective intentions of the parties prior to the services being provided. It may take into account an expression of intention if this is included in the terms of the underlying contract.

These comments on control are helpful, but the test for IR35 remains nuanced and far from clear cut in many cases. Therefore, as the new rules come in companies are going to need to look carefully not just at the day to day control exerted over contractors but also consider what ability they have to ultimately step in. 

Gillian Murdoch & Jeremy Edwards, Baker & McKenzie

Issue: 1464
Categories: In brief