Review onboarding procedures after Adrian Chiles’ IR35 tax ruling, warns lawyer

TV presenter Adrian Chiles is facing a £1.7m tax bill after losing his appeal against HMRC over his tax status during his tenure at ITV and the BBC. The case is both an interesting and important ruling on IR35 – we’ll speak to a tax expert about that. 

Chiles has been embroiled in a decade-long legal battle with the tax authority over whether he should be classified as an employee or freelancer. He initially won the argument back in 2022 but the Revenue successfully appealed to the 
Upper-Tier Tribunal which has now ruled that ‘errors of law’ influenced the judgement. The case now returns to the First-Tier Tribunal. 

Business Matters reports on this and gives the background to the case. HMRC’s position has been that Chiles was not a freelancer when working for the BBC and ITV between 2012 and 2017 and should have paid tax as an employee, notwithstanding he worked as a contractor through his limited company, Basic Broadcasting Ltd since 1996. If Chiles loses, he will owe £1.2m in income taxes and nearly £500,000 in NICs. 

A reminder. The IR35 rules apply where the individual would have been an employee for tax purposes if they had engaged directly with the business and not through the PSC. There is no precise legal test to determine employment status for tax purposes, rather the test has been developed through court decisions and is based on a number of factors. It means the law in this area is unclear which causes no end of problems for the courts and clients alike. High-profile presenters like Kaye Adams and Gary Lineker have faced similar battles with HMRC under the controversial IR35 rules which can lead to lengthy and expensive litigation.

So, let’s get a view on this latest development. Penny Simmons is a tax specialist who has followed the litigation closely and earlier she joined me by video-link to discuss it.

Penny Simmons: “Okay, so as any lawyer does, I'm going to caveat what I say. It’s good for business but it’s not necessarily good for the status of the law in itself at the moment because we are clearly back in a period of uncertainty where cases are going to the First Tier Tribunal, they're getting appealed, and appealed again so that's not good and, clearly, it's not good for Adrian Chiles that this matter is still ongoing. Why do I think it's good for business? Okay, so I think it's good for business, really, for two reasons. First off all is to do with what the Upper Tribunal have said in terms of what information the business should have taken into account when trying to determine whether Adrian Chiles was an employee for tax purposes. Now, I'm not going to go into the details of the Upper Tribunal’s decision, or the First Tier Tribunal’s decision, but what they did say was that you had to follow the case of Atholl, which was a Court of Appeals decision and, again, not delving into that, just focusing on what the key point there was, they said that the BBC and Sky needed to take into account information that they knew, or ought reasonably to have known, about whether Adrian Chiles was in business on their own account and I think that's good for business because it limits what the business - because if you think about the IR35 rules now the onus is on the business to make those status determinations - it limits what information a business is expected to take into account when making status determinations and particularly when putting the facts together to build up this picture as to whether, looking at all the facts and circumstances, an individual should be an employee for tax purposes. It limits, if you like, the onus there to look at what the business knew, or ought reasonably to have known, rather than just all the information that was out there about an individual contractor. The second one is very much focused on the business on own account test, if you like, or factor that's relevant when you're determining employment status for tax purposes. Now, there's been a lot of concern by business about what exactly do they need to look at when trying to work out whether a contractor is in business on their own account? Now, you've got to remember that the test for determining employment status for tax purposes was put together and it's been built, if you like, through case law, but on the old law, the old IR35 rules where it was for the contractor and the contractor’s personal service company to work out whether they should, or shouldn't, have been an employee for tax purposes. We've switched over since April 2021 as we've talked about multiple times, and the onus is now on business to make that determination and there has been a lot of concern for businesses when asking the questions about business on own account. So trying to work out is the contractor in business on their own account? What do I need to ask? What information do I need to collect? How can I reasonably assess whether a contractor is in business on their own account? What the Upper Tribunal said was you need to follow Atholl, which was the Court of Appeal’s decision, and you need to be considering the issue of whether a contractor is in business on their own account in the right context. The court talked about the ‘hypothetical contract’ but to simplify this I'm going to say in the context of the relationship between that worker - so in this case, Adrian Chiles - and the business engaging that worker, so in this case the BBC. Why I think this is helpful for business is that we're in a situation now where businesses are being told, you need to consider whether the contractor was in business on their own account, but only in the context of your relationship with that contractor. That’s useful, I think, because it's limiting what kind of information and how a business needs to assess whether a contractor is in business on their own account and that’s particularly useful and relevant, if you like, in the context of businesses that are engaging contractors through agencies. So often, as we've talked about before Joe, a business won't even have a direct relationship with the worker, rather it’s the agency that has the relationship with the worker and the business, if you like, has to say to the agency, can you collect this information from the worker so that we can run the test to determine whether they should be an employee for tax purposes. I think it’s useful, because it's narrowing the remit of what business on their own account means - it means looking at it in the context of the relationship between the worker and the business, not generally in the context of that individual worker’s other business relationships because, as I've said to you before, Joe, but I think it's worth highlighting to listeners, that somebody can be an employee and also in business on their own account. Are you self-employed? So, you could be an employee one day a week, and running your own business part time for three or four days a week. That is possible and I think that this decision underlines that.”

Joe Glavina: “You talk about the need for end user clients at the onboarding stage to ask more questions to find out about the work the contractor has been doing. Presumably, the message to HR is to get that procedure standardised. So, send your agencies some sort of pro-forma, or such like, to make sure that the right questions are asked?” 

Penny Simmons: “Absolutely, and this is what we've been talking about, Joe, for quite a while when I have referred to how businesses need to have onboarding processes, due diligence processes, in order to collect information about their workers, about PSC contractors entering their supply chain, so they can make those status determinations and, ultimately, there's no set format as to what that information process should look like. There’s no set format for that but what we would be recommending - and I work with lots of businesses to do this - is that the business has an onboarding questionnaire that is sent out to any contractor that they're going to engage with who is engaging through an intermediary such as the personal service company, for which IR35 would apply and, ultimately, that questionnaire is often going to be sent not by the business directly to the worker but where the business uses an agency, that questionnaire should be sent via the agency. But whether you use an agency or not, as we talked about before Joe, the onus, the responsibility is for the engaging business to make those status determinations. So they have to make sure that information is collected from the worker and if they can't do it directly because the agency owns the relationship, if you like, then they need to have an agreement in place with the agency whereby the questionnaire will be sent by the agency to the worker, collected back from the agency, and delivered, handed over, to the business so the business can make those status determinations.”

Joe Glavina: “Given how difficult it can be to make status determinations and the price you pay, potentially, if you get it wrong, surely clients should just use HMRC’s status determination tool, CEST, and simply rely on the result of that. That, presumably, makes it pretty much risk free doesn’t it?”  

Penny Simmons: “I would never say that anything is risk free. We know that the IR35 rules, and particularly the test for determining employment status for tax purposes, is incredibly complicated. We know that we know that it's uncertain, and we're seeing that as it plays through the courts with decisions being made and decisions being overturned. So there's a lot of complexity and a lot of uncertainty. To manage risks. and to reduce risks to an acceptable level, it is important that businesses introduce compliance processes. They need to identify contractors before they engage with them - contractors engaged with personal service companies - and they need to make those status determinations. So they're going to need to ask questions, as I've just explained, in order to be able to make status determinations. Yes, CEST is a useful tool. I appreciate, and we've talked about this before, that it is limited and there's lots of discussion about whether it reflects the current law because, as we keep seeing, we're discussing today, there are constantly cases going through the tribunals and it's not like CEST is updated to constantly reflect the decisions being made, but it is useful because the Revenue says that you can rely on it. There is a caveat there if the information you put  into it is true and, and accurate so, again, you've got to be careful with how you use CEST and what information you put into it and how you collect that information. If you do all of that, then yes, I think you've done everything you can to manage your risks, and reduce your IR35 risk to an acceptable level, and to have taken what we call reasonable care in making those status determinations so if the Revenue ultimately challenges those determinations, and says, look, I appreciate you made determinations but we're going to disagree with them, then at least you can turn around and say, well, okay, you may disagree with them but I've taken reasonable care and, hopefully, the Revenue would then take that point and that would limit your tax exposure and, particularly where you've used an agency, it would stop tax liabilities going up the chain. So that's probably a really long-winded way of saying that you can't eliminate risk - I wish I could eliminate risks for business but I can't - but you can manage those risks by having an effective IR35 compliance process. So, asking the questions so you can make comprehensive status determinations with a full accurate picture of how the contractor is working for you, then I think you can manage your risks to an acceptable level.”

Penny and her tax colleagues have prepared a guide on IR35 to help clients understand the rules and how they work in practice. That’s ‘IR35: taxation of off-payroll workers explained’ and it’s now from the Out-Law website. 

LINKS
- Link to Out-Law guide: ‘IR35: taxation of off-payroll workers explained’