HMRC win employment status case after appeal

Determining whether a worker engaged off-payroll (either directly on a self-employed basis, or through a limited company) should be treated as an employee for tax purposes, is a complicated process. HMRC have regularly challenged such arrangements, on the basis they believe such workers have not been correctly treated as employees.

Following a string of high-profile defeats at tribunal, it was announced this week that HMRC had successfully defended an IR35 (tax legislation introduced to ensure that contractors who work in the same way as employees and pay the correct amount of tax) appeal at the upper tribunal, having originally won at the first-tier tribunal (the first formal and independent stage of any legal dispute). The case related to a Sky Sports presenter and former professional and international footballer, Neil McCann (ex-Southampton, Rangers, and Scotland player for the curious amongst you). The tax and National Insurance at stake are a reported £210k.

The first-tier tribunal had found that under the terms of the hypothetical contract (the theoretical contract that should exist between the parties based on the actual working arrangements of the engagement, and not what is outlined in any written contracts) between McCann and Sky, McCann could not be in business on his own account (as outlined below). They further concluded that the provisions of the hypothetical contract were consistent with a contract of employment. The upper tribunal accepted and agreed with this interpretation.

From the reading of the case, I have to say for once that I didn’t think McCann’s appeal had much chance of success. He worked almost exclusively for Sky Sports and was paid an annual fee paid in monthly instalments, irrespective of how much work or how many shows he was on i.e. he was basically receiving a salary. These payments continued even outside of the football season, and most of McCann’s income came from his work from Sky. As with all the TV presenter cases, even though McCann could effectively say what he wanted on air, he was still governed by numerous editorial guidelines and direction by Sky, who held the ultimate control over the output. These factors show a large amount of control over McCann.

Control is not the be all and end all when it comes to employment status, but it does carry a large amount of weight at a tribunal. We have seen recently in other cases (Adrian Chiles and Kay Adams), that the deciding factor was that they were in business on their own account. They have several businesses with presenting and journalistic interests, that convinced the tribunal that they were genuinely self-employed and that each individual contract was just part of that bigger picture.

This is where these cases were able to rely upon the third of three conditions that must be met, for a contract of service to exist, as per the ‘Ready Mixed Concrete’ case:

The other factors present are consistent with a contract of service. Factors such as ownership of significant assets, financial risk and the opportunity to profit are not consistent with a contract of service.

So, if someone is genuinely in business on their own account, there cannot be a contract of service, and therefore no employment (hypothetical or otherwise).

It is also interesting to note throughout these cases that whilst the courts appear to be siding with HMRC on the MOO (mutuality of obligation) aspect i.e. MOO exists where work is provided in exchange for payment, this is not anywhere near enough on its own for a contract of employment to exist. It may now be time to consider ignoring HMRC’s stance on MOO, which is widely considered to be incorrect, when clearly it carries little weight at tribunal.

It appears that McCann didn’t have the wide breadth of other business interests outside of working for Sky, for that argument to be made. He did take on the caretaker manager role at Dundee FC for 6 weeks, stepping away from his Sky duties during that time. However, the fact he was still receiving his regular monthly payment from Sky did nothing to help his case.

IR35 remains incredibly complex with subjective legislation. We are still seeing clients coming to us with IR35 queries, especially where HMRC’s Check Employment Status for Tax (CEST) tool is ‘unable to make a determination’. IR35 issues are still very much around and do not look like they are going anywhere. We are also seeing increased compliance activity from HMRC, with the use of their off payroll working questionnaire. This appears to be a quick and cheap way for them to carry out desk-based risk assessments on businesses.

If you have received one of these letters or you would like to discuss your off-payroll working systems and processes, to get a better understanding of how compliant you are, please contact Joe Rowsell on [email protected].