When considering someone’s employment status for the purposes of determining tax liability (where a person provides their services through an intermediary), the Court of Appeal held in Her Majesty’s Revenue and Customs v Atholl House Productions Ltd that a finding of mutuality of obligation and control did not create a presumption of employment and the courts must take into account 'all other relevant factors'.
Basic facts
Atholl House Productions Limited was a personal service company set up by the journalist and broadcaster Kaye Adams. Although she personally fronted a specific show for the BBC, the contract for her services was between Atholl House and the BBC, rather than with her as an individual. In other words, the company acted as a third party through which the terms on which she was paid for the show were agreed with the broadcaster.
HMRC decided that Ms Adams should be treated for tax purposes as an employee of the BBC. It considered that the arrangements whereby her services were provided through a personal services company (PSC) were caught by IR35, as set out in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003. Consequently, she owed thousands of pounds in income tax. Ms Adams argued that she was a freelance journalist who was “in business on her own account”.
Relevant law
In broad terms, IR35 applies where an individual personally provides services for a client through an intermediary (a PSC) but who would, if the contract was hypothetically directly between the client and the individual, be regarded as an employee for income tax purposes.
When determining if IR35 applies, it is necessary to determine the terms of the hypothetical contract between the client and the individual (based on the actual contract between the client and the intermediary) and decide if it is a contract of employment.
Decisions of First and Upper Tier Tribunals
Atholl House appealed to the First Tier Tribunal (FTT) against HMRC’s assessment. Applying Autoclenz Ltd v Belcher and ors (weekly LELR 229) it held that the contracts did not reflect the agreement reached between the parties. In particular, despite being written in the contract, the BBC did not have first call on Ms Adams’ time nor did it have any control over her other engagements. As such, the contracts were not contracts of employment.
HMRC appealed to the Upper Tribunal (UT) which found that the FTT had wrongly applied Autoclenz. Nevertheless, it concluded that the hypothetical contract between Ms Adams and the BBC was inconsistent with a contract of employment because she had been treated as self-employed in earlier years.
HMRC appealed to the Court of Appeal on the basis that the Upper Tribunal had misunderstood the third stage of the test in Ready Mixed Concrete (SE) Ltd v Minister of Pensions and NI. After considering minimum tests of mutuality of obligation and control, HMRC argued that the tribunal should then have considered “all other relevant factors”. Specifically, it should have considered the express and implied contract terms to determine the status of the hypothetical contract between Ms Adams and the BBC and not whether she had been in business on her own account.
Decision of Court of Appeal
Disagreeing with the first part of HMRC’s arguments, the Court of Appeal made clear that the test of whether someone is in business on their own account remains an important factor for courts to consider when deciding whether someone is an employee or not.
However, it agreed with HMRC that the UT’s reasoning with regard to the third stage was flawed in that it had failed to sufficiently examine 'all other relevant factors'. In some cases, this might be restricted to a consideration of the express and implied contract terms, although a wider range of factors had been taken into account in previous authorities. It therefore remitted the case to the UT to apply the correct test in this case.
Comment
The tests for determining employment status for the purposes of employment rights and the tests that apply for determining employment status for tax purposes often overlap. What is interesting in this case, is that the court appears to have limited the application of Autoclenz to those cases which determine employment rights. What implication this has for determining employment status for the purpose of IR35 remains to be seen.