IR35 has been one of the most contentious pieces of accounting legislation since its introduction in April 2021 as HMRC works to prevent those it deems are employed by an organisation taking their income through a separate company.
Previously, any large company employing a contractor for services did not need to consider that contractor’s status for tax – it was the responsibility of the contractor, not the company to determine how that person dealt with their tax affairs.
However, with the advent of IR35, the onus was placed instead on the company employing the contractor, which has led to a number of court cases between HMRC and those challenging this approach. The companies – known as end-users – who need to consider the IR35 position of contractors they are working with must have a turnover of more than £10.2m, a balance sheet of more than £5.1m or more than 50 employees.
There have been many cases so far where service providers using their own limited companies have chosen to legally challenge the approach taken by HMRC and their employment status under IR35. One of the latest is S & L Barnes vs HMRC. Stuart Barnes is the ex-England rugby union player who works as a pundit for Sky and uses a company to provide his services for the broadcaster, and also for the newspaper columns he writes for The Times and the Sunday Times among other work. HMRC claimed Mr Barnes owed more than £695,000 in unpaid tax and National Insurance contributions as it believed he should have been considered employed by Sky, a position he challenged.
During the 2013-14 to 2018-19 tax years, Mr Barnes earned around 60% of his income from Sky, but this subsequently fell when Sky’s rugby coverage reduced. Case precedents created in particular by the Ready Mixed Concrete case resulted in a so-called ‘three limbed’ approach being taken to determine whether someone should be considered an employee of the company.
This is a relatively complex legal method which considers whether or not the ‘employer’ has sufficient control over the employee’s work, along with a mutual obligation between the ‘employee’ providing the services and the employer who provides the work and pays for it.
If both exist, then a further test is applied to decide whether the ‘employee’ is in a service contract, or one providing services.
In the case of Mr Barnes, the Tribunal found that he was not to be considered an employee of Sky in this instance as he had a high degree of autonomy in the way he worked with Sky, and also worked with many other organisations using his specialist rugby knowledge at specific times which he was at liberty to choose.
However, every case is different, and each turns on whether certain conditions and parameters are met. This is why the application of IR35 has been so complex for companies to understand. Yet this proves that while HMRC is determined to focus on IR35 cases, there are instances where people can be engaged for work outside of IR35.
If you need to determine whether someone you are working with comes under IR35 rules, then please get in touch and we can help you to get this important decision right.