Court of Appeal’s recent decision on IR35 cases

May 25, 2022

On 26th April 2022, the Court of Appeal passed its judgement over two appeals (HMRC v Atholl House Productions Limited and Kickabout Productions Limited v HMRC) relating to the application of the IR35 legislation.

In brief, the IR35 legislation provides that where an individual personally performs their services to the client through an intermediary and the circumstances are such that, absent the intermediary, the individual would have been an employee of the client, payments in respect of the services provided by the individual are subject to employment income tax and NICs under PAYE.

Both these cases involved the provision of services by individuals through their respective personal service companies for fees. The Atholl case concerns the presentation of a radio show, “The Kaye Adams Programme” on BBC Radio Scotland by journalist and broadcaster Kaye Adams through her personal service company for the tax years 2015/16 and 2016/17. The Kickabout case concerns the presentation of the “Hawksbee and Jacobs Show” on Talksport Radio by Paul Hawsbee through his personal service company for the tax years 2012/13 to 2014/15.

In both cases, HMRC concluded that the IR35 legislation applied (as an employer employee relationship existed between the individuals and their client) and therefore the payments made to the intermediary companies were liable to employment income tax under PAYE and national insurance contributions.

The First Tier Tribunal (FTT) in both these cases found for the taxpayers. On appeal by HMRC, although the Upper Tribunal (UT), in the Atholl case found for the taxpayer, it differed its reasoning from the FTT’s reasoning. In the Kickabout case, the UT reversed its decision in favour of HMRC.

In the Atholl case, the UT’s decision was set aside as the Court found that the UT was wrong to have determined Kaye Adams’ employment status by basing it on the status of her other engagements and professional career rather than basing it on the terms and conditions of the engagement with the BBC and by taking into account matters which were not or may not have been known to the parties. The Court has remitted the case back to the UT for the decision to be remade on the basis of the FTT’s finding of fact. The Court of Appeal dismissed the appeal by Kickabout.

The Court established important points of principle as to the right approach in the determination of the employment status in the light of the leading cases in this area.

The principles in Ready Mixed Concrete (South East) Ltd v The Minister of Pensions and National Insurance [1968] 2 QB 497 (RMC) are applied to determine whether or not a contract of employment exists. There are three tests; first, whether the agreement involves mutual obligations on the parties to each other, second, whether there is control by the engaging party, and if the tests in (i) and (ii) are established then (iii) whether there are other provisions of the contract that are consistent with a contract of service.

Third limb of the RMC test

HMRC contended that so far as the application of the third RMC test is concerned, the UT had erroneously applied a “business on own account” test rather than focusing on the ‘other provisions of the contract’, as required by RMC. In this regard HMRC contended that the “business on own account” test in Hall V Lorimer is a different test which should not have been applied by the UT.

The Court held that RMC and the line of cases including Hall v Lorimer do not prescribe separate tests. Both approaches recognize that mutuality of obligation and control are necessary, but they are not sufficient conditions for employment. If these two conditions are satisfied, both approaches require the overall assessment of all of the relevant factors in the particular case (multi-factorial test). While a strict reading of the third condition in the RMC test might exclude consideration of any factor beyond the express and implied terms of the contract, there are many authorities in which a wider range of factors were taken into consideration.

Whether the parties agreed to create an employment relationship needs to be judged objectively by taking into account the contract and the circumstances in which it was made. Those circumstances are the same as those comprising the factual matrix which existed at the time the contract was made and which were known or reasonably available to the parties.

Application of decision in the Autoclenz case to determine employment status

The Court of Appeal further held whether an individual would be regarded as an employee of the client for the purposes of the IR35 rules is to be determined by the application of the common law tests of employment.

The principle in Autoclenz Ltd v Belcher and others [2011] UKSC 41 should not be applied in such cases. Autoclenz dealt with the statutory construction of a term such as ‘worker’ for the purposes of the protection of the statutory employment/worker rights. In Autoclenz, the Supreme Court had ruled that, when determining an individual’s status for employment rights purposes, tribunals may disregard terms included in a contract that did not represent the true agreement between the parties.

Our views

The Court of Appeal held that for there to be a contract of employment in the context of IR35, in addition to there being mutuality of obligations between the parties and control by the engaging entity, it is also important to conduct the multi-factorial examination. All relevant factual aspects known or which could reasonably have been known at the time of the contract are to be taken into consideration objectively, to determine whether the parties agreed to create an employment relationship.

In our view, on the one hand, the ‘wider’ multi-factorial examination to determine the status of a service provider is good news to many freelance contractors as their personal self-employed status may assist them in determining that they did not have the intention to enter into an employment relationship. On the other hand, it creates uncertainty for entities responsible for making status determinations when engaging contractors through their personal service companies; accordingly, it is likely that we would see opposite results being determination on same or similar facts.

For more information, please contact JD Ghosh.

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