The recent case involving Christa Ackroyd and her working relationship with the BBC, has highlighted HMRC’s increasing focus on targeting engagements that try to avoid being ones of employment. In the past there has been significant tax savings for both the client and the worker, and while recent changes on the taxation of dividends has reduced the tax differential, there are still national insurance contributions savings and savings on sick pay, holiday pay and now obligatory pension contributions for employers.
Typically, where workers claim to be “self-employed” and in business for themselves the onus still rests with the business they are working for to determine their status for tax purposes. Generally, to be self-employed for tax purposes the individual must be free to control how they provide their services, free to provide substitutes and be subject to real financial risk in doing so. In the above case, Ms Ackroyd used a personal service company (‘PSC’) at the behest of the BBC and the UK tax tribunal ruled that the “IR35 legislation” applies which broadly taxes the worker as if they were a direct employee with the PAYE tax liability falling on the PSC. In Ms Ackroyd’s case the PAYE shortfall amounted to £419,151 and HMRC have confirmed that this is the first judgement in a number of cases involving BBC presenters who were engaged in a similar manner.
Employment Status has always been the subject of complex HMRC legislation, guidance and case law. There are many listed indicators and more recently HMRC published a “Check Employment Status Test”; an online tool whose results HMRC are prepared to stand over. However, while employers can rely on the result, nothing is black and white and the tool is not without limitations, notably the “We’re unable to determine the tax status of this engagement” outcome which can result from a single change in answer to just one of the questions. While HMRC have flagged key employment type indicators, they do not apply in every circumstance and judging the weight they should be given can be tricky.
If the engager is comfortable the worker is not an employee, then they must clarify whether the worker is self-employed or supplying services through a third party such as a PSC. This is relevant for public sector bodies whereby, in an attempt to tackle the loss of tax as a result of engaging workers as “disguised employees” which HMRC estimates costs to the Exchequer £2.1b, the rules changed from April 2017. Where the services are to be supplied via a third party the onus is now on the public sector body to determine if the IR35 rules apply and if they deem this to be the case then they must process any tax payments to the worker through the payroll system, deducting the appropriate employment taxes.
HMRC are currently consulting on the rules for the private sector and there is growing belief that they will roll out the public sector rules across the board. Although HMRC state that they are considering many scenarios’s the one certainty is that engagement with contractors and PSC’s is going to change and anyone engaging in this way will have to seek expert advice to ensure they do not fall foul of the rules.