Another IR35 case heard at the Court of Appeal

In this article we consider the recent IR35 judgment concerning, Kickabout Productions Limited (KPL), involved the well-known Talksport presenter, Paul Hawksbee (PH). We analyse the CoA’s judgment which focuses on the employment status of a hypothetical contract. As our regular readers will be aware, IR35 is a rather unique area of law as it generally applies in circumstances where:

An individual personally performs services for a client, the services are not provided under a contract directly between the client and the worker and the circumstances are such that had the services been provided under a contract between the client and the worker, the worker would be considered to be an employee of the client.

The legislation is unusual in that it, specifically, requires the employment status of a contract (that does not actually exist) to be determined. Further, if it is determined that this ‘concocted’ contract would have been one of employment, the intermediary (prior to April 2021) is liable for additional tax and NICs.

There is some history behind this case which started at the First tier Tribunal (FTT). The FTT found, based on the facts it had ascertained from contractual documentation and witness evidence, that had Talksport contracted directly with PH, the contract would not be one of employment and thus IR35 would not apply to the arrangements.

HMRC disagreed with the FTT’s conclusion and appealed the matter to the Upper-tier Tribunal (UTT). The UTT also disagreed with the FTT and set aside the FTT’s decision. At this point, the UTT could have decided to remit the case back to the FTT or make its own decision. In this case, the UTT decided on the latter and concluded that IR35 would apply to the arrangements.

The UTT concluded differently to the FTT, specifically, on the important factors of Mutuality of Obligations (MOO) and control (both discussed below).

KPL raised four grounds of appeal to the CoA, that the UTT erred:

• in its interpretation of the contracts as regards the obligation of Talksport to provide work;
• in its approach to the jurisdiction to remit or remake the decision;
• in its evaluation of the issue of control;
• in its approach to the evaluative exercise to be undertaken at stage three of the Ready Mixed Concrete (RMC) test (this last ground being very similar to the discussion in the Atholl House Productions judgment which was covered last week).

We will look at the first and last two grounds of appeal below. For completeness though, it should be noted that there was no argument that PH was not personally obliged to provide the services and therefore it was not necessary for personal service to be considered by the CoA.

Mutuality of Obligations (MOO)

KPL’s argument on the first ground was to focus on the contractual terms and the fact that the terms lacked any specific obligation on Talksport to provide work to KPL and challenged the interpretation / construction of the terms by the UTT.

The UTT decided that although there was no express term setting out Talksport’s obligation, in the context of the contract as a whole, the express engagement of KPL for a fixed period to provide the Services was sufficient to constitute a binding commitment by Talksport to provide at least some work.

This, together with other areas of the contract that required PH to make himself available for work for at least 222 days per year on a first call basis; PH was paid per show; PH could not work for another UK broadcaster; and it appeared to the UTT that KPL would agree to such obligations which would prevent PH from working full time elsewhere on the assumption Talksport did not also have an obligation to provide work. According to the UTT such an expectation from KPL was contrary to business common sense.

Unfortunately, for KPL, the CoA agreed with the UTT.

Control

The CoA went on to consider control, in particular the variable weight to be attached to different elements of the control test.

KPL argued that certain control factors, such as when and where services had to be provided could not carry weight in the overall assessment as the services could only be provided at the studio at the time a broadcast was required.

KPL’s argument centred on whether Talksport had the ultimate right of control over PH in the performance of his services.

The CoA (similarly to the UTT) accepted that Talksport had little practical control over “how” PH performed his services but concluded that this was no different to a highly skilled person performing services.  It was the right to control the content of the programmes that gave Talksport more control over the services of PH.

The CoA went on to state that control is a necessary, but not necessarily a sufficient, condition for the existence of an employment relationship. There may well be a framework of control which, by a greater or lesser margin, is sufficient for these purposes but will not, when all other relevant factors are assessed, be sufficient to establish employment.

Multi-factorial assessment

The final ground of appeal concerned the overall assessment of employment status once MOO and control had been found to exist in the arrangement.

The CoA agreed with the UTT decision making process in respect of this stage often referred to as Stage 3 of the RMC test.

However, one important point that the CoA did make (in agreement with the Atholl House judgment) was in reference to how such an assessment should be made.

In the judgment analysed last week, the decision went into some detail as to whether the existence of MOO and control in a contract provides a view that there is an employment contract in existence unless there are inconsistent factors that can displace the prima facie conclusion.

The CoA, in this case and Atholl House, have taken a different view to that set out above and have instead preferred a different approach, i.e., that the Stage 3 test should look at all relevant factors (including MOO and Control) and determine on the facts overall whether in the round the engagement is one of employment.  The key point being that even if MOO and control are a pre-requisite of employment, all other factors must then be reviewed before the matter can be concluded.

Finally on this matter, the CoA also reaffirmed the position in and from Atholl House that even where a sufficient framework of control is established, the extent and quality of that control can form part of the overall assessment and be integral to the multifactorial assessment.

The outcome of this is that the test as expounded in RMC remains the fundamental case law test for determining employment status. It has never been the case (as HMRC have from time to time argued) that you can ignore the irreducible minimum (control and MOO) and move straight to painting an overall picture. But equally, even if you find the irreducible minimum of control and MOO, this does not automatically render a contract caught by IR35. In short, the Courts are still required to consider the overall picture.  Therefore, the final part of the RMC test is just as crucial as the first two stages and, insofar, as the important factor of control is concerned, if it is established that a sufficient framework of control exists, it is imperative to give it due consideration as a part of the overall assessment and together with all other factors.

Summary

This judgment is very important in the context of employment status, particularly when it comes to the tax jurisdiction. It reaffirms important principles starting with the effect of any written terms that are agreed between the parties.

This judgment also distinguishes from employment status disputes that provide protection to individuals (such as the Working Time Regulations). The CoA was clear that the recent Supreme Court judgment in Uber v Aslam can be appropriately distinguished from an IR35 dispute, as the case concerned protective legislation designed by Parliament to protect vulnerable workers and so required a different approach when considering contractual agreements.

In the context of IR35, however, the decision will certainly affect those personal service companies that are still in the midst of a dispute with HMRC. A recent House of Lords review quoted HMRC stating that they had approximately 250 cases in the broadcasting industry of which over half had been settled. The more recent judgments may well galvanise HMRC further and will no doubt ramp up settlement of such cases.

Needless to say, this judgment highlights the complexities of employment status, particularly in the context of a hypothetical contract.  Such cases can take years to resolve, often with incorrect conclusion from HMRC (and as was the case here, even the FTT).  The case law framework in this area is far from being simplified which will no doubt cause concern for those that continue to engage self-employed sub-contractors as well as those that continue to engage personal service companies.

As a point of note, given the change in the IR35 rules as of April 2021, the decision on employment status now lies with the engaging party (assuming the engager is a medium or large business).

One last point to mention is a technical point picked up by one of the judges surrounding the first set of written terms.  The written terms were agreed between Talksport and PH, rather than Talksport and KPL.  The judge suggested that the FTT was not right in law to change the parties to written terms in the way that it did (the FTT put it down to an admin error), however, this error did not have a material impact on the judgment.

Whilst the judge suggested the position here was immaterial to the judgment, of course, if the terms were in fact between Talksport and PH, then IR35 should not have been in dispute as there is no intermediary between the client and the worker.  Instead, HMRC should have considered employment status more generally.  Ultimately, the employment status outcome would most certainly have been the same, but the liable party would have been Talksport rather than KPL!

To avoid such a complication (which seemed to confound the FTT and the CoA), it is imperative that the correct parties to a contract are identified in written terms.

As always for advice and information on IR35 or any other employment status matter please get in touch with your usual contact on the Chartergates Team.