In two recent cases, the Court of Appeal has provided some guidance on the test to determine if someone is an employee for tax purposes. In doing so, it considered and, in some key respects, distinguished the approach taken when determining whether someone is an employee or worker for the purposes of employment rights. The result may well be a different answer when determining status for tax purposes from the answer for the purposes of employment rights.
The key takeaways from the recent Court of Appeal cases of Atholl House and Kickabout are:
- The starting point for assessing the nature of the relationship is the contract between the individual (or their personal service company) and the company engaging them. This is a significant difference from the approach in employment rights cases, where the contractual terms can be ignored if they do not reflect the reality of the relationship.
- So, for example, the contractual provisions relating to the level of control over the worker, or even the parties’ view as to the nature of the contract, may be materially more significant in a tax case than an employment rights case (although not necessarily determinative).
- If the contract contains provisions relating to notice and suspension, this suggests that there is an overarching level of mutuality of obligation. Otherwise, those terms would not be necessary.
- These cases are not the final say on this matter and so companies should keep alert for further updates. In addition to any potential appeals, Atholl House is being remitted back to the lower tribunal and other similar cases are also being heard.
In more detail
The two cases, published on the same day with the same judge giving the leading judgment, focus on contractors in the media sector, both radio presenters: one for Talksport (“Kickabout case“), one for the BBC (“Atholl House case“). They were IR35 cases, the presenters having been engaged via personal service companies (PSCs), so the Court of Appeal had to consider in each case whether the individual would have been an employee in the hypothetical situation where they had been engaged directly. However, the judgments are relevant for companies determining the status for tax purposes of both contractors engaged directly, as well as those engaged via personal service companies.
The fundamental test applied by the Court to determine the status of the workers was the same as that which is applied in employment rights cases, namely that set out in Ready-Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance Contributions (RMC). The RMC test has three limbs:
- Is there mutuality of obligation between the parties?
- Is there a sufficient level of control by the engaging company?
- Are the factors and terms of the relationship consistent or inconsistent with an employment relationship?
The third limb had previously been described as a negative test, i.e., whether there were sufficient factors to suggest that it was not employment. In these cases, the court confirmed that it is an overall assessment of the relevant factors, including the extent of mutuality and control. This is important because there can be varying levels of both and so, whilst there may be sufficient mutuality and control to satisfy the first two limbs, their significance should be reconsidered along with the other factors in the third limb. The court also confirmed that the factors to take into account are only those known or those that could reasonably have been known by the engaging company. In these cases, the previous working pattern of the contractor, both for the BBC/Talksport and others, was relevant. But the presenter’s future work in the Atholl House case, after the end of the BBC contract, would not have been known by the BBC and so was not a relevant factor to consider.
Whilst the court confirmed that the terms of the contract are the starting point for the assessment, if the terms themselves conflict, the courts will not take a purely literalist approach. For example, if the contract states (or implies) that there is no obligation on the engaging company to provide work, but requires the contractor to be available for a period of time, restricts the contractor from working for others and contains notice provisions if the contractor wishes to terminate the contract, the reality of the contract is that there is mutuality of obligation on the engaging company. On the other hand, this suggests that courts will take into account statements as to the parties’ intentions, for example, a statement that the contractor is not an employee.
These comments mean that companies should be more comfortable that their agreed contractual terms will be taken into account, when determining the tax treatment of contractors (whether this is favourable or not). It also means that companies should ensure that they do not retain more contractual control than they need and that the contracts reflect their working practices and include the relevant protections. However, it remains the case that an employment tribunal could reach a different conclusion on employment status than a tax tribunal, for employment rights purposes.
Cases: Kickabout Productions Ltd v HMRC and HMRC v Atholl House Productions Ltd, Court of Appeal