Ross McConnell - Kinross Based Chartered Accountant

HMRC Lose Their Taste For The Spotlight

by ROSS MCCONNELL on APRIL 01, 2019

When Is A Freelancer Not A Freelancer?

Those of you with long memories and a sweet tooth will remember the debate around when is a cake not a cake – brought into focus when McVitie’s went to court against HMRC in 1991, to claim Jaffa Cakes were a chocolate covered cake (hence zero-rated) and not a chocolate covered biscuit, which was subject to VAT. McVitie’s won.

This week the question HMRC had in mind was: ‘when is a freelancer not a freelancer’? Answer, when they are actually an employee. 

HMRC has been cracking down on IR35 in advance of new rules that will be applied from April 2020. IR35 is the tax legislation that seeks to target tax avoidance by workers who use an intermediary, such as a limited company, to contract their services to a client who would otherwise be recognised as their employer. HMRC regards these contractors as 'disguised employees', and seeks to tax their earnings as if they were an employee of the client organisation.

But determining when someone is employed directly or not is a complex problem, and the question of control is key to determining whether a person is employed or self-employed.

Now on the surface, I would have thought Lorraine would have been an easy win for HMRC. In the end, the case revolved around two main factors – did Lorraine have a right to provide a substitute, and  how much control did ITV have and how much supervision was Lorraine under.

Surely the producer of the show has overall control? 

And as for substitution, isn’t the clue in the name of the show: “Lorraine”?

Well it turns out to be just the opposite. Apparently Lorraine Kelly was pretty much in control of the whole programme, the production team had minimal control and supervision over her. She also had a right to provide a substitute, and in fact had done so, and was instrumental in identifying who that substitute would be.

Other factors were considered too, all of which pointed towards Ms Kelly being truly self employed, meaning IR35 did not apply in her case. Lorraine Kelly achieved a victory over HMRC, saving her an estimated £1.2m in tax. 

A costly blow for HMRC, but one that is unlikely to stop them from challenging other IR35 contracts. 

This ruling is good news for many working in the media, which has many presenters using a limited company structure to work often on one main show – like Lorraine. In fact, last year, a National Audit Office report revealed that, according to the government’s Check Employment Status for Tax (CEST) tool, 92% of BBC presenters working under their own companies would be “employed for tax purposes”. 

But IR35 doesn’t just apply to high profile entertainers: it also potentially covers any contractor who provides their services to a client and who bills for this through a limited company, including consultants working in both the public and private sectors, and many contractors working in construction. 
it seems likely that most private sector contractors will be impacted by the April 2020 changes, as many work for large clients. For example, ITV amounted to 33% - 37% of Albatel’s turnover. (The limited company set up by Lorraine Kelly and her husband to bill her work.) That increased to 65% to 69% when Kelly also presented Daybreak. (HMRC accepted that Kelly’s other assignments charged through Albatel did not fall within IR35.) 

So if you have a single large client then you are at risk. 

If you believe you might be affected under the new regulations I would be happy to discuss IR35 and can offer a contract review, to establish whether you are at risk of being affected. 

But don’t wait, it’s best to check your status early, and get time to adjust.

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