Alex Kiernan, shared his thoughts on the changing definition of self-employed status with HR Magazine recently following Lorraine Kelly’s win against HMRC’s million pound tax bill.
Lorraine Kelly has hit the headlines with a win against HMRC to the tune of £1.2 million in saved taxes and National Insurance (NI) contributions.
HMRC claimed the Scottish broadcaster was an ITV employee, but she said she was a freelancer. Judge Jennifer Dean ruled that the relationship that Kelly had with ITV “was a contract for services and not that of employer and employee.” The judge ruled in Kelly’s favour that she was a “self-employed star.”
This is to some extent a surprising decision. But it demonstrates the challenges HMRC faces and has put the entertainment industry under the spotlight. HMRC has been taking a more robust approach to challenging the status of individuals working through companies to provide their services ahead of the extension of the IR35 rules to the private sector.
Brief re-cap of the IR35 Rules
The Government implemented IR35 legislation with the aim of preventing a form of perceived tax avoidance. IR35 applies where individuals seek to avoid paying employee income tax and NI by supplying their services through their own limited company, a Personal Services Company (PSC).
HMRC may apply IR35 if it considers that the purpose of the PSC was to avoid being deemed an employee/worker and avoid payment of employment tax and NI.
HMRC will then assess the factual and practical reality of the relationship, as well as the express contractual arrangement. HMRC will apply a complex test to determine whether the relationship is one of a truly self-employed individual or not. If not the contractor may face unpaid tax liabilities and potential penalties.
What does this mean for HR advisors in the entertainment industry?
Employers and their contractors in showbiz should not rest on their laurels, as each case is determined on its own merits. It’s essential to ensure that all employers and contractors accurately reflect their relationship with each other, not only in the contracts between the parties but also in their day to day engagement.
This is obviously a concern for sectors such as the entertainment industry, which commonly use contractors who supply their services via a PSC. Although April 2020 may seem a long way off, companies that are likely to be affected by these changes should be taking preparatory steps to introduce the necessary changes.
Such steps should include:
- Identifying and reviewing your consultant/contractor relationships.
- Communicating with all affected workers, and discussing potential options.
- Ensuring your terms of engagement with contractors and consultants are clear and accurately reflect their true status
- Consider converting contractors or consultants into salaried employees or workers.
HMRC often relies on the day-to-day relationship to successfully support claims that the individual is not a contractor but an employee or worker. In Kelly’s case she had signed a contract with ITV to present a show and agreed on the deal through her PSC.
HMRC tried to claim that she became an ITV employee, but she denied that tax and NI should have been deducted from her income under the PAYE system. Kelly had been providing her services to several businesses for some considerable time and had control over the work she took on, both of which are key requirements to meet the self-employed criteria.
The Tribunal hearing the case found that the IR35 rules did not apply in her case, but HMRC is considering whether to appeal.