Lessons from HMRC v Kickabout Productions Ltd
Key Contact: Claire Knowles
Author: Rebecca Mahon
The Upper Tax Tribunal has overturned a decision of the First Tier Tribunal regarding the IR35 rules, finding in favour of HMRC. In its comprehensive judgment, the Upper Tax Tribunal provides a masterclass in determining employment status for tax purposes.
Employment status and IR35
All employers should already be aware of IR35, or the “intermediaries legislation”, or the “off-payroll working rules” to some extent. These are rules introduced by HMRC to help tackle “bogus” self-employment arrangements that seek to benefit from a more attractive tax treatment. They apply when company “A” contracts with company “B” for services, and those services are carried out by an individual who owns/has a material interest in company B. When company A pays company B for the services, it will pay company B without PAYE deductions and it will be up to company B to make appropriate PAYE deductions from the payments that it makes to the individual that carried out the services. However, it is possible for company B (which, in effect, is the individual) to “fiddle the books” in this scenario by, for example, paying themselves the minimum wage and for the majority of his/her income to come from dividends (which are taxed at a lower rate than employment income).
IR35 effectively gives HMRC the powers to assess, but for the existence of company B, if the individual would have deemed employment or worker status with company A. If the answer is “yes”, HMRC can seek to recover the amount of tax that should have been paid (to the extent it hasn’t already been paid) in relation to the services from company A and/or the individual.
The effectiveness of IR35 in its present form has been routinely brought into question. As such, from April 2021, company A will be required to carry out its own assessment as to whether, but for company B, the individual would have deemed employment status and if so, it will need to make PAYE deductions from the amounts paid to company B. These rules already exist in the public sector. Please refer to our website Know-How pages for further articles on these rules and our “IR35 Assist” tool which helps companies in making their assessments as to whether a subcontracted individual would have deemed employment or worker status.
Supervision, direction, control
HMRC have historically focussed on three key indicators when considering whether an individual has employment status for tax purposes: supervision, direction and control. The more supervision, direction and control that a company (or the “end client”) has over its contractor, the more likely that contractor is to have deemed employment status in the eyes of HMRC.
The focus of HMRC tends to be narrower than what an employment tribunal will look at when considering issues of employment or workers status. For example, an employment tribunal will often consider wider factors such as the intentions of the parties, the degree of financial risk taken on by the contractor and how the contractor appears to the outside world. Ultimately however, both the tax and employment tribunals will look at the overall circumstances of the relationship to determine, but for the existence of an intermediary, the individual would be an employee of the end client.
Ready Mixed Concrete and the “irreducible minimum”
In the Kickabout case, both the First Tier Tribunal and the Upper Tax Tribunal turned to the “famous” case of Ready Mixed Concrete. Within this case the Employment Tribunal upheld that a “multiple” test must be applied when determining employment or worker status, and shuns the suggestion that there can ever be one single determinative factor. In Ready Mixed Concrete, it was established that a court must always consider (as part of the “multiple” test) whether:
- an agreement exists to provide the servant’s own work or skill in the performance of service for the master (“personal service”) in return for a wage or remuneration;
- in the performance of that service, the master has a sufficient degree of control over the servant (“control”); and
- the other provisions are consistent with a contract of service (“other factors”).
If all of these things are apparent, it is possible for a “hypothetical” contract of employment to exist. However, if any one of these things are absent, a contract of employment cannot (in theory) exist. These three factors are therefore referred to as the “irreducible minimum”.
Other factors: “mutuality of obligation”
Arguably, the most important “other factor” in the irreducible minimum is whether there is a mutuality of obligation to do work, and for work to be provided. Without this, it is unlikely that a contract of service will be held to exist and so any additional “other factors” are largely irrelevant.
Background of the Kickabout case
Mr Hawksbee was contracted, via his personal service company (Kickabout) to present a radio show for Talksport (the Hawksbee & Jacobs Show). He was required to present the show 222 days each year and Kickabout was paid £525 +VAT per episode. The contract was for 2 years (albeit at the time of HRMC’s challenge, the show had been running for 18 years) and both parties had to give 4 months’ notice to terminate early. Whilst Hawksbee and Jacobs wrote the content for the shows, they would need to factor in things like advertisement breaks, regular news updates etc. in line with OFCOM requirements. The show was “live”, but there was around a 14 second delay before broadcast and the Talksport producers had the ability to quickly “dump” content if it breached OFCOM requirements.
The findings of the First Tier Tribunal
Considering Ready Mixed Concrete, the First Tier Tribunal concluded:
- There was an obligation on Hawksbee to provide a personal service; but
- Talksport had “relatively narrow” rights to control “what” services Hawksbee could be required to perform. Hawksbee could be obliged only to present the show and perform some ancillary obligations relating to promotion of the Talksport brand; and
- the “bare minimum of mutuality of obligation” was present, because Talksport had no obligation to provide Hawksbee with any shows to present. Therefore this was not “strongly indicative of an employment relationship”.
The First Tier Tribunal noted that the strongest indicators of employment status were the degree of Hawksbee’s economic dependency on Talksport and the fact that Hawksbee had been presenting the show for 18 years without interruption. However, applying the irreducible minimum, it was not satisfied that an employment relationship could be said to exist.
The analysis of “control” and “mutuality of obligation” provided by the Upper Tax Tribunal
The Upper Tax Tribunal disagreed with the findings of the First Tier Tribunal.
Considering the matter of control, it noted the following points:
- Talksport could control “where” and “when” Hawksbee performed his duties. It also had material rights of control over “what” tasks Hawksbee performed because it had the ultimate right to decide on the form and content of a particular episode of the show. The fact that, in practice, Talksport was content to give Hawksbee a high degree of autonomy did not alter that conclusion. Quoting Langstaff J in Wright v Aegis Defence Services (BVI) Ltd “the “control” test is focusing on the right of control and not how, or if, that right was exercised in practice”.
- Talksport had little practical or contractual control over “how” Hawksbee performed his duties. However, referring to the 2020 Upper Tribunal decision in Professional Game Match Officials Limited v HMRC: “… a practical limitation on the ability to interfere in the real-time performance of a task by a specialist, whether that be as a surgeon, a chef, a footballer or a live broadcaster, does not of itself mean that there is not sufficient control to create an employment relationship”.
When looking at the issue of “mutuality of obligation”, the Upper Tribunal considered that:
- “in the context of the contract as a whole, the express engagement of [Kickabout] for a fixed period to provide the services was sufficient to constitute a binding commitment by Talksport to provide at least some work. This is not a case where the contract provided merely a framework within which Talksport would offer particular pieces of work … There was no need for a separate offer of particular pieces of work, given the engagement to carry out the services for a fixed term, in the same way as a company engaging a person as ship’s captain is necessarily agreeing to provide the ship in question”
- The right for either party to terminate the contract on four months’ notice was indicative of an obligation on Talksport to provide work and “makes little sense if Talksport is entitled simply to stop providing shows for Mr Hawksbee to present”.
- The fact that Kickabout was contracted to provide the services for 222 days’ each year would make it extremely difficult for Hawksbee to earn a living by working full-time for anyone else. The Upper Tribunal said, therefore, that the conclusion that Talksport was not obliged to offer Kickabout or Hawksbee any work at all was “so contrary to business common sense as to call into question whether it was the true effect of [the contract]. Business common sense points, on the contrary, to a conclusion that [the contract] set out a contractual regime under which, in normal circumstances, Mr Hawksbee was, during the term of that contract, to be provided with a show to co-present on every weekday between 1pm and 4pm”.
Whilst there is nothing which is earth-shatteringly “new” in the Upper Tribunal’s judgment, it does provide a useful steer on some points which were previously very much open to interpretation. In particular (in relation to control) the reemphasis of the point that an inability to interfere with the services provided by the contractor in “real-time” is not fatal to the existence of an employment/worker relationship will be a worrying conclusion for a number of “specialist” consultants. The fact that the Upper Tribunal found that an engagement to provide services for a fixed term and the existence of a notice period were indicative of a mutuality of obligations will need to be taken into account by businesses and their lawyers when drafting consultancy agreements going forward. Perhaps the most interesting and novel point, however, is the determination of the Upper Tribunal that it would be “contrary to business sense” for a contractor to accept terms that would make it very difficult to earn a living if work was subsequently not provided by the company, and accordingly where contracts require a high level of commitment from the contractor in question, this in turn may indicate an obligation on the company to provide work (notwithstanding any statements within the contract which suggest otherwise).
What this case also emphasises is the importance of a properly drafted consultancy contract that has thoroughly assessed the individual terms of the engagement and that they reflect a genuine self-employed engagement.