UK: IR35: Employment Status Tests Post Atholl

Employment status difficulties

Determining employment status for tax purposes to enable the correct payment of income tax and NICs on earnings has resulted in contractors and companies being involved in considerable head scratching.  Grappling with case law, HMRC's approach and often fluid arrangements in the provision of contractor services has created uncertainty as to whether a contractor would be in employment with the end user client, and whether they therefore fall inside or outside IR35 legislation.  Combined with the need to carry out status determinations introduced by the Off Payroll Working Rules, all parties involved in the provision of contractor services cannot be blamed for thinking the goalposts are subject to continual change. 

Numerous tax tribunal decisions over the years have resulted in inconsistent and confusing decisions. However, a ray of clarity by the Court of Appeal has been brought to bear on the correct approach to the application of the employment status tests in the recent, but long running, media case of HMRC v Atholl House Productions Limited.

Court of Appeal decision

In Atholl, the Court of Appeal were required to determine HMRC's appeal as to whether the Upper Tribunal (UT) had been correct in its decision that the IR35 rules did not apply to a radio presenter (Kaye Adams) providing her services to the BBC via a PSC. The UT had determined there would have been no contract of employment in existence between Adams and the BBC had the arrangements been directly between those parties. The existence of a contract of employment, albeit a hypothetical one, is required for a contractor and its intermediary to fall within scope of IR35.

It was not in dispute that the established employment status factors of control by the employer and mutuality of obligation need to be present for employment to be confirmed. However, these two factors alone do not create a presumption of employment. It is incumbent in the decision making to consider a further approach as to whether other provisions of the contract are consistent with employment. This is recognised as the “third limb” Ready Mix Concrete case test of “other factors”, where a multi-factorial assessment of the arrangements needs to be made to enable a determination of the relationship status.

HMRC's appeal challenged the application of the third limb test when control and mutuality of obligation had been found to be present and argued that the UT decision should have been restricted to an analysis of the contract terms. HMRC argued that an analysis of whether a contractor was in business on their own account should have been given little weight. The Court of Appeal did not agree with HMRC'S arguments and concluded that the “in business on own account” test remained highly relevant as part of the other factors that needed to be considered. That included the manner in which services had been provided previously and not only in the tax year in question.
 
Undertaking an analysis of status should not be limited once control and mutuality has been determined. It remains highly relevant as part of the consideration of whether an employment contract exists to determine all the known factual circumstances, including whether a contractor has performed services for other parties and the capacity in which those services were performed (i.e. under an employment contract or as a contractor in business on their own account).

Although the UT had considered the third limb test, the Court of Appeal found the manner in which they did so was flawed as they focused on the difference of the activities the presenter provided for the BBC under the contract at that time and those the presenter provided as an independent contractor elsewhere to demonstrate the presenter was in business on their own account.  The UT did not go into sufficient detail on the “other factors” that should be worked into the analysis of employment status. The UT did not look at the capacity in which the presenter performed the activities and failed to carry out an overall assessment of the arrangements.

The Court of Appeal also determined, and agreed with the UT, that the First Tax Tribunal (FTT) had wrongly applied the Autoclenz principle, where terms included in a contract could be disregarded if they did not represent the true agreement between the parties (i.e. the reality of the situation). Although the Autoclenz principle had been used in the 2021 Uber case where the Supreme Court looked beyond the contract to ascertain the reality of the situation and sought to protect vulnerable workers by affording them statutory employment rights, this would not always be the correct approach. In Atholl the vulnerable worker context did not exist, and as such, Autoclenz should not have been applied and normal principles of contractual construction were required.

Although the Court of Appeal rejected HMRC's primary point of appeal that courts should restrict their analysis to the terms of the contract, as a result of the flawed decision making in Atholl leading to the decision that there was no employment for tax purposes, the Court of Appeal has remitted the case back to the Upper Tribunal to enable a decision to be made on status using the correct factors.

What is the Atholl impact on contractor arrangements going forwards?

As HMRC's interpretation of employment status case law has been found to be incorrect, they will need to review their CEST test guidance. On the basis that the CEST test has become the default analysis tool for status determinations for many organisations there will be uncertainty around its outcomes until it is revised. Companies may therefore consider it more appropriate to use an alternative form of analysis.

Contractors with a portfolio of work showing they are in business on their own account can expect to have the entirety of their arrangements considered going forwards rather than looking at the individual contract they have with the client.

Mutuality of obligation and control tests remain of fundamental importance, but work should be done in any employment status dispute to evidence the “other factors” that may determine the employment status in real terms.

What is certain, is that the all parties involved in determining employment status will continue to be nervous of the decisions they reach due to the complexities of determining individual circumstances and the prospect of appeals by the unsatisfied party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.