IR35 Tax Rules: Adrian Chiles’ Tribunal Appeal Highlights Challenges for UK Contractors

The recent tax battle between Adrian Chiles and HMRC over IR35 Tax rules or off-payroll working rules has cast a spotlight on this complex piece of UK tax legislation.

Many contractors, particularly those in the media industry, find themselves caught in the cross-hairs of HMRC’s heavy-handed application of IR35 tax rules, facing hefty tax bills, assessments and penalties if they are deemed “disguised employees”.

Contact our tax team for expert legal advice on whether HMRC’s assessment of whether you or your contractors are employees for the purposes of IR35 legislation. You may have a case worth fighting and potentially saving large sums in current and future tax assessments.

What is IR35?

IR35 is tax legislation designed to ensure that contractors who conduct work in essentially the same way as employees, pay the correct amount of tax.

Who does IR35 apply to?

The IR35 rules in general apply to:

1. workers;
2. who provide a service;
3. to a company or individual;
4. through an intermediary;
5. where this service might ordinarily be done by an employee.

What are the IR35 tax rules?

IR35 or off-payroll working rule is a UK tax regulation designed to address a loophole that allowed workers to reduce their tax liabilities by establishing a limited company or partnership instead of being directly employed. Officially known as Chapter 8, Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and referred to as the Intermediaries Legislation, the term “IR35” originates from a 2000 press release by the former Inland Revenue, which introduced this legislation. Today, “IR35” has become the widely recognised shorthand for this tax rule.

Individuals often operate through limited companies, known as Personal Service Companies (PSCs), which can potentially offer tax advantages. IR35 legislation counteracts this potential tax avoidance by determining whether an individual working through a PSC should be classified as self-employed or an employee for tax purposes. Essentially, if the individual’s working arrangements closely resemble those of an employee, they will be subject to income tax and National Insurance contributions as if they were directly employed, irrespective of their PSC status.

Why are Contractors Facing Scrutiny by HMRC?

The recent string of IR35 or off-payroll working cases involving high-profile presenters like Adrian Chiles, Gary Lineker, and Kaye Adams, highlights the challenges of applying this legislation, particularly in the media.

The crux of the issue lies in determining whether a contractor, working through their PSC, functions more like an employee of the broadcaster or production company. This is a complex question, as presenter contracts can vary significantly.

Here’s where things get complex:

• Control vs. Autonomy: Does the broadcaster dictate working hours, location, and even attire? Or does the contractor have significant control over their schedule and workload?
• Substitution: Can the contractor send a substitute to fulfil their obligations, or are they expected to perform the work themselves?
• Mutuality of Obligation: Is there a guaranteed stream of work from the broadcaster, or does the contractor have to actively seek out new projects?
• Financial Risk: Does the contractor bear the financial risk for equipment, travel, and other expenses, or are these covered by the broadcaster?

HM Revenue and Customs (HMRC) seems to be taking a stricter approach with IR35, and some see this as overly rigid. If a contractor loses their IR35 case at the First-tier Tribunal (FTT), they face significant financial repercussions:

• Backdated income tax and National Insurance contributions
• Hefty penalties
• Legal costs

The Broader Impact of IR35

While the recent media cases grab headlines, IR35 impacts a much wider range of contractors across various industries:

• IT Contractors: Developers, programmers, and IT consultants frequently work through PSCs. Determining their IR35 status depends on factors like project control, equipment ownership, and the ability to subcontract.
• Marketing & Communications Consultants: These professionals often work on a project basis with various clients. IR35 hinges on factors like client control over deliverables, working hours, and the ability to subcontract work.
• Construction Contractors: Freelance plumbers, electricians, and other skilled tradespeople may operate through PSCs. IR35 assessment here looks at control over working methods, materials used, and whether they can bring in subcontractors.

This is not an exhaustive list, but it highlights how IR35 casts a wide net across the contractor landscape.

The Adrian Chiles IR35 Tax Dispute

The Upper Tribunal (UT) judgment in the case of Basic Broadcasting Ltd (Chiles’ PSC) vs HMRC sheds light on the ongoing challenges with IR35. While Chiles initially won his case at the FTT, HMRC appealed, arguing that the tribunal had misapplied the law. The Upper Tribunal agreed, finding that the FTT had incorrectly focused on whether Chiles was “in business on his own account” rather than on the specific terms of the hypothetical contract between him and the broadcasters.

The UT also introduced a new element to the case, questioning whether the BBC and ITV had sufficient knowledge of Chiles’ other work engagements. This could potentially impact the determination of whether he was operating as a genuine business.

The potential consequences for Mr. Chiles are significant. If the FTT’s final decision aligns with the UT’s judgment, he could face a tax and National Insurance contributions (NICs) bill of around £1.7 million.

This case serves as a cautionary tale for contractors, particularly those in the media industry. The onus is on the individual to demonstrate their IR35 status, and the lines between “employee” and “contractor” can be blurry.

Do the IR35 rules affect my company?

Companies will not have to comply with the new IR35 legislation if they satisfy two or more of the following criteria:

1. an annual turnover of not more than £10.2 million;
2. balance sheet total of not more than 5.1 million; and
3. number of employees of not more than 50.

Is it worth fighting HMRC?

Yes. If you have a case with merits, you may have the right to challenge a tax appeal or tax assessment (but there is ordinarily a 30 day time limit). Seek legal advice as soon as possible.

HMRC are also bound by internal guidance, for example their Litigation and Settlement Strategy (LSS) to resolve tax disputes. HMRC will not usually persist with a tax dispute unless it potentially secures the best practicable return for the Exchequer and HMRC has a case which it believes would be successful in litigation.

Our team of tax specialist solicitors and barristers (our leading barrister was previously counsel to HMRC) offer effective and robust representation for you.

Expert IR35 Tax Dispute Lawyers

At LEXLAW, we recognise the intricate challenges contractors encounter in today’s dynamic tax environment. Our specialised team of legal experts is dedicated to IR35 compliance, providing bespoke solutions to protect your interests and mitigate tax disputes. Whether you are a seasoned independent professional or embarking on your freelance journey, we offer comprehensive legal support tailored to your specific needs.

The ongoing IR35 discourse, exemplified by high-profile cases such as Adrian Chiles, Gary Linker and Kaye Adam, underscores the complex landscape contractors navigate. As tax regulations continue to evolve, proactive legal counsel becomes indispensable in safeguarding the rights and financial well-being of self-employed individuals.

Our law firm’s taxation practice has extensive experience guiding contractors through the intricacies of IR35. Here’s how we can assist you:

• IR35 Status Assessment: We can analyse your specific working arrangements and advise on the likelihood of being caught by IR35.
• Contract Review and Negotiation: We can review your existing contracts with clients and help negotiate new ones that minimise your IR35 risk.
• HMRC Negotiations: If HMRC challenges your IR35 status, our team can represent you in negotiations to reach a favourable outcome.
• Tribunal Representation: In the event your case goes to the First-tier Tribunal (FTT), our experienced lawyers can effectively present your arguments.