Posted on 9th September 2020 — Victoria Kirsch
Eamonn Holmes lost his battle against the tax man. But why did IR35 lead him to lose his case? And what does this mean for individuals and organisations, before and after IR35 is revised?
It is hardly surprising that in the wake of COVID-19, income tax cases and the government’s announcement to delay the proposed changes to IR35 have passed unnoticed.
However, amid the initial buying frenzy of cheap flights to Italy – I myself was tempted – and before the true reality of the impact of COVID-19 was understood, the First-Tier Tribunal’s (FTT) decision in Red, White and Green Limited v the Commissioners for HMRC was published.
If you have heard of this case that may be because it concerns the tax affairs of the famous TV personality Eamonn Holmes. Star appeal aside, this case is also interesting as it concerned the application of tax rules known as IR35. Despite Holmes’ posturing pre-trial that there is “nobody more freelance than me”, the FTT disagreed and held that the relationship between ITV and Holmes was caught by IR35, despite Holmes’ “considerable autonomy”. Essentially, the judge found that if Holmes had been engaged directly by ITV rather than via his personal services company (PSC) he would be an employee and not a self-employed contractor.
As the government has recently decided that the revised IR35 rules – which were due to come into effect in April 2020 – should be reinstated in the Finance Bill 2020, it is a helpful time to reflect on the perils of IR35 and why Holmes lost this case.
IR35 is a set of rules introduced in 2000 that, in essence, seek to tax contingent workers who work in a similar way to employees, as employees. This despite the fact they contract through a PSC (the “Contract or”).
A PSC is a company which is beneficially owned by the contractor. The contractor holds more than 5% of the company in the form of shares or the right to receive 5% or more of the distributions from that company. Through that company the contractor provides their own personal service. A PSC could also be an individual, partnership or a managed service company but in practice it is likely to be a company as described above. IR35 does not apply to individuals who are engaged directly by the company receiving the service (the ‘end client’) or engaged via another company (provided that company is not the individual’s PSC).
IR35 will apply where the arrangements between the contractor and the end client are such that, if engaged directly, the contractor would have been an employee of the end client.
Where an arrangement is caught by IR35, the PSC must treat the amounts received as employment income of the individual worker and operate PAYE. This means that income tax and National Insurance contributions (NICs) will be due on the payment the PSC receives from the end client and this amount will need to be withheld and remitted to Her Majesty’s Revenue and Customs (HMRC). Currently, the obligation to withhold the income tax and employee NICs lies with the PSC. The PSC is also liable to account for any employer NICs that may arise on the payment. However, from April 2021 new rules will apply which will shift this liability to the end client (please see further below).
The FTT found that overall the relationship between ITV and Holmes was one of employment, not self-employment. Judge Morgan held that Holmes was a “disguised employee” of ITV and agreed with HMRC that income tax and NICs should have been applied on past payments. It is reported that Holmes’ PSC owes HMRC up to £250,000 in back taxes.
Holmes via his PSC, Red, White and Green Limited (RWG), entered into three separate contracts with ITV for the period 2012-2015 to provide his services as a presenter on This Morning. Holmes asserted he was a self-employed contractor and not an employee for the relevant period, describing himself as a “one-man band”, “answerable to no one but himself… a gun for hire – on my terms”. HMRC disagreed and provided RWG with notices for unpaid income tax and NICs in respect of Holmes on the basis that IR35 applied to this engagement.
Holmes was engaged by ITV to provide services under a series of assumed contracts, which remained in place for 11-12 months at a time. Under the contracts Holmes was required to provide his services for at least the specified number of shows.
The dates and place of work were fixed but ITV could change these and decide other dates and places “at their sole discretion”.
A fixed fee was paid for each engagement (i.e. for each show). Holmes was entitled to certain benefits by virtue of this arrangement, including:
ITV also provided all necessary insurances. He was not entitled to sick leave or holiday leave.
Holmes waived all rights over any intellectual property and copyright to ITV.
ITV held unlimited editorial rights and, indeed, Holmes acknowledged that ITV “shall have absolute discretion and control over the editorial content of the programme and over the products of [Holmes’] services”.
Holmes (and his PSC) both warranted that neither would “enter into any professional or other commitment or undertake work for any third party which would or might conflict with the full and due rendering of [Holmes’] obligation herein”.
Holmes did not have any substitution rights. If a replacement was required, ITV would be responsible for sourcing that person. Holmes would not be paid for any missed shows (unless ITV was at fault).
Morgan determined that whether the IR35 test is met “is not a mechanistic exercise, but one of looking at all the factors”. The decision in this case came down ultimately to the extent that there was Mutuality of Obligation (MOO) and Control. As Morgan noted in the case notes: “I have concluded that there was sufficient mutuality and at least a sufficient framework of control to place the assumed relationship between ITV and Mr Holmes in the employment field”.
So what is MOO and Control in the employment context? ‘MOO’ refers to the employer’s obligation to give work and the employee’s obligation to complete it. It is one of the key tests used to determine an individual’s employment status. ‘Control’ concerns the right of the engager to control what the worker must do, where it has to be done, when it has to be done by and how it has to be done. Control is a necessary condition of an employment contract and must be present in order to satisfy the test in Ready Mixed Concrete.
Taking each of the relevant factors in turn, Morgan found that, in relation to each contract between ITV and RWG, ITV was required to provide work on specified dates and Holmes was required to work on those dates for a fixed fee. As such, Morgan found that MOO was satisfied throughout the term of each engagement. The fact that the days were agreed between Holmes and ITV and that Holmes had no right to extend the contract was not in itself determinative (relying on the decisions in Stringfellow and Windle). It was sufficient that there was MOO during the term of each contract (on the basis of the decision in Island Consultanta Ltd).
Holmes’ counsel conceded that MOO existed but disputed that the other tests to indicate an employment relationship (namely, Control) existed sufficiently to place the arrangement within IR35.
RWG and Control: “I am my own creation. I am not anybody’s slave on This Morning”.
Control was recognised by Morgan as a “necessary feature of [the] employment contract”. On Control, counsel for Holmes argued that every contract had an element of control but that ITV did not have a sufficient degree of control over how Holmes carried out his services for ITV. Counsel compared Holmes to a house painter. “If a person engaged a painter to paint his house, he determines where the work is to be carried out, when it is to be carried out, when it is to be done by [etc]… Although in a sense these are matters of control, they are simply the framework within which the services are to be performed.”
Further, counsel, relying on Mr Dennings’ view in Bank voor Handel en Scheepvaart NV v Slatford, argued that Holmes was definitely not “part and parcel” of ITV’s operation. Instead, counsel explained that the contractual restrictions in Holmes’ contract were illusionary and were never intended to be exercised.
The fact that Holmes worked as an anchor on Sky’s Sunrise at the same time was given as evidence of the fact that the contractual restraints under Holmes’ contract did not in practice apply to him. Moreover, counsel highlighted the degree of autonomy and control that Holmes himself exercised over This Morning, pointing to Holmes’ witness statement where he maintained that:
“Once I am on air, I am effectively in total control of what needs to happen…[I]t is me telling [ITV] what to do, not the other way around…[I]n practice I dictate [the show]”.
In their submissions, HMRC referred to the case of White and another v Troutbeck SA to support their view that it is the right to overall control or a framework of control which matters rather than day to day control. Further, HMRC’s counsel argued that ITV had a contractual right to control how Holmes performed his duties, even if in practice that control was not exercised.
“Mr Holmes is simply incorrect, as a matter of contract, to say that he is ‘answerable to no one but myself’ and to imply that he has complete control over the show.” ITV had the ultimate right of control under the hypothetical contract (including editorial rights) and may reject any editorial submission made by Holmes. ITV controlled when and where Holmes performed his services.
Ultimately, Morgan agreed. Although Holmes had “considerable autonomy”, Morgan determined that Control akin to that of an employment relationship existed. Morgan pointed to the following factors as determinative in her decision:
Although Morgan admitted that Holmes had “substantial input into the [form] and style of the programme and that he was engaged by ITV for his individual skill base in doing so”, she rejected counsel for Holmes’ assertion that the Control terms of the contract were not a “real” right of Control and relied on the authority in Autoclenz, finding that “the fact that a right in a contract is not exercised or is not enforced does not necessarily negate the existence of that right as a term of the contract”.
In the judge’s view, it was immaterial that Holmes considered he did not work to the terms of the agreements (e.g. with respect to restrictions on his commercial activities). Instead, this was merely reflective of the fact that ITV had chosen not to enforce these provisions on Holmes. Ultimately (as counsel for Holmes admitted), ITV had the right to decide what stories to cover and who to be interviewed and had responsibility for the content of the show. “ITV has overall control over deciding the thing to be done and, in a broad sense, over the manner in which it was done”.
Further, Morgan determined that ITV’s lack of control over the precise manner in which Holmes presented This Morning (e.g. ITV’s inability to control what he did live on air) did not preclude the existence of an employment relationship. Instead, it was reflective of the fact Holmes is a highly skilled presenter.
Morgan agreed with HMRC’s counsel that the arrangement is more analogous to that of an employed football player or a surgeon, rather than determinative of self-employed status.
Relying on Davies v Braithwaite and Hall v Lorimer, counsel for Holmes argued the individual engagements had to be looked at in the context of the worker’s overall business activities and pointed to the gaps between engagements with ITV as determinative of self-employment status.
However, although Holmes did undertake a series of one-off arrangements with other engagers during the relevant period and such earnings were taxed on the basis he was self-employed, the court thought it was significant the majority of his earnings came from ITV for This Morning. (Further, Morgan was careful to note that the question of whether the correct tax had been applied to Holmes’ other earnings was not the subject of this case).
Further, Morgan found that the gaps (some as little as six weeks) between contracts were not significant to indicate self-employment (but was more akin to part time employment). The judge noted that “[it] can hardly be said that such a short and regularly timed gap renders the engagement during the contractual period as casual, occasional or sporadic”.
Plus, the fact that Holmes did in fact present on This Morning during those gaps, but via a different PSC, “does cast the gap in the arrangements with RWG” as Morgan admitted “in a somewhat different light”.
Morgan also determined that Holmes had no opportunity for financial gain or financial risk in relation to his contracts with ITV – a hallmark of self-employed status. Neither Holmes nor RWG had any expenditure in relation to the arrangements. Morgan dismissed (somewhat unsurprisingly) that Holmes provided his own earpiece.
Instead, Morgan highlighted that Holmes enjoyed several benefits from these contracts, including use of a car and travel and clothing expenses. Crucially these benefits were not paid for through RWG which would have been required in order to keep the benefits outside of IR35.
Finally, Morgan concluded the arrangement could fall inside IR35 despite the absence of certain employment benefits (e.g. sickness/holiday leave), which Morgan considered not to be a “material consideration pointing against employment”.
The test for IR35 (the ‘IR35 Test’) (as set out above) will remain the same: would there be an employment relationship if (hypothetically) the contractor providing the personal service was directly engaged by the end client?
Under the new rules (which will apply to payments made on or after 6 April 2021):
The reform does not introduce a new tax or apply to the self-employed who are outside the scope of the existing rules.
No. Under the new rules, the arrangements with ITV would still have been inside IR35. This is because the IR35 Test is not changing. However, the difference is the unpaid tax liability (in this case £250,000) would fall to ITV (as the end client) and not to Holmes’ PSC (Red, White and Green Limited).
Victoria Kirsch is an Associate in the Employment and Benefits team at Baker McKenzie.