HMRC has won a case concerning employment status and the IR35 rules. The IR35 legislation aims to ensure that in defined circumstances individuals working for an intermediary such as a personal service companies pay the same tax as an employee performing the same function.

An individual working for the public broadcaster BBC was providing services through a personal services company called Christa Ackroyd Media (CAM). HMRC claimed additional tax on the grounds that from 2006/07 until 2012/13 the individual was employed by the BBC and should therefore have been taxed as an employee.

The Court found that the BBC had the ultimate right to specify what services CAM should provide and the contract with the BBC restricted the provision of services to other organizations without the consent of the BBC. Certain services to the BBC were obligatory and the under the contract the BBC was obliged to pay fees to CAM on a monthly basis. These features of the contract would indicate that there was an employment relationship and the Court’s decision upheld the claim by HMRC to additional tax.

Subsequent to the tax years covered by this case, changes made to the IR35 legislation from April 2017 in relation to the public sector have shifted the responsibility to comply with the IR35 legislation from the contractor to the fee-payer, in other words from the personal services company itself to the organization paying the fee to the personal services company. The fee-payer must now make the decision on whether IR35 rules apply to a contract and if they do apply the fee-payer is responsible for operating the deemed direct payment calculation to the fees paid to the personal services company, deducting income tax and national insurance contributions as required by the PAYE system.

The public sector body that is the end client of the personal services company is required to provide its conclusion as to the IR35 status before the contract is concluded (or prior to the services being provided if later). However this conclusion does not have the force of law and can be challenged. HMRC has made available an online tool to help determine the applicability of the rules and the employment status of the contractor.

Further changes are planned to the IR35 rules from April 2019, at which time the rules for the private sector will be modified. In the Autumn Budget 2017 the Chancellor announced a consultation on the issues. The final legislation is likely to include provisions similar to those already applying to the public sector.