The Court of Appeal (CoA) recently passed judgments in two statutory appeals against IR35 assessments in the cases of Kickabout Productions Ltd v HMRC [2022] EWCA Civ 502 and Atholl House Productions Ltd [2022] EWCA Civ 501.
At para 56 in Atholl House, Sir David Richards stated “It might be supposed that, and it would certainly be desirable if, there were one clear test or approach to determining whether a person was an employee. Important legal consequences flow from this determination.”
IR35
From 6th April 2021 onwards, If you are a client receiving services from a worker through their intermediary, you as the client became responsible for making an assessment of the working relationship between the client and the individual worker to determine that if there was no intermediary would the status of the worker would be that of an employee of a self-employed individual for tax purposes.
If the status of the individual is deemed to be that of an employee, then you as the client are compelled to make payroll and NIC deductions in addition to meeting employer NIC. Beyond the issue of whether the individual is to be taxed as self employed or as an employee are the full suite of rights that are afforded as to an “employee” as defined by section 230(1) of the Employment Rights Act 1996.
Employment Status Tests for Tax and Employment
What complicates such assessments and ultimately having to issue a Status Determination Status (SDS) under the off-payroll rules (IR35), before any payments are made or services provided, is that the actual tests for determining employment status for employment law purposes are not the same as the test for determining employment status for tax purposes. In an employment sphere, an individual can be an “employee”, a “worker” or an “independent contractor” however for tax purposes the only categories are “employee” or “self-employed” (i.e. independent contractor) with no “worker” category. The test for tax purposes under IR35 is guided by HMRC’s Check Employment Status for Tax (CEST) tool.
CEST
HMRC and their updated Check Employment Status for Tax (CEST) tool (subject to no manipulation in order to achieve a favourable outcome) have agreed to be bound by such a determination subject to the information provided is accurate and that the CEST tool is used in accordance with the relevant HMRC guidance. CEST is HMRC’s own online questionnaire from which an end client can determine whether the individual falls inside or outside of IR35 for taxation purposes.
In September 2018, HMRC compared the results produced by applying the tool with tribunal decisions and found that of the 24 cases, the tool returned the same result except in two cases, where the tool determined that the individual was employed but the tribunal determined the individual was self-employed.
Employment Test
An individual regarded as employed for tax purposes will not necessarily be regarded as an employee for the purposes of employment legislation, such as being afforded protection against unfair dismissal. The CoA in Atholl House and Kickabout appeals reviewed the authorities in respect of determining employment status and the judgments set out the correct approach to Judge MacKenna’s three-point test in the case of Ready Mixed Concrete v. Minister for Pensions [1968] 1 All ER 433:
[i] The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.
[ii] He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.
[iii] The other provisions of the contract are consistent with its being a contract of service.
HMRC Succeeded in Both Appeals
In Kickabout, the CoA upheld the decision of the Upper Tribunal (UT) that there was an obligation on Talksport Radio to provide work to Paul Hawksbee’s personal service company, Kickabout Productions.
In Atholl House, the CoA found that the UT was wrong to have determined the employment status of Kaye Adams under a hypothetical contract with the BBC by starting with the status that she had over the course of her professional career rather than the terms and circumstances of the particular engagements with the BBC.
Conclusion
The takeaway from the CoA’s decision in these two cases is to follow the three-stage test in Ready Mixed Concrete when determining whether an individual’s status is that of an employee. The first two test factors; mutuality of obligation and control could indicate an employment relationship is in existence but without the third limb being satisfied first two limbs will not confirm employment status in isolation. The Client will need to make a multi-factorial assessment, under the third-limb of the Ready Mixed Concrete test to determine whether an employment relationship exists.
Disclaimer
- Please note – this guidance is not intended to be taken as legal advice – for individual situations you will need to take specific legal advice.
- The information in this guide is correct as of June 2022 and should be read alongside the government’s specific guidance.
Marie Walsh
Director, Employment Solicitor and Mediator
Direct Dial 0113 8874670
Mobile 07736252681
Reception: 0113 3229222
Address: 4 Park Place, Leeds LS1 2RU
Victoria Horner
Senior Associate
Direct Dial: 01138874673
Andy Boyde
Employment Solicitor
Direct Dial: 0113 323 0346
Mobile: 07595 520 508