IR35 Win for Adrian Chiles Highlights Complexity of Rules as Contractor Scepticism Continues

This week saw broadcaster Adrian Chiles win his seven-year battle with HMRC and its claim that he owed over £1.7 million in tax. A first-tier tax tribunal ruled that Chiles was correct to organise his financial affairs through his company, Basic Broadcasting, and he was not in effect an employee of the BBC and ITV and was instead “in business on his own account.”

The IR35 rules were introduced in 2000 to prevent self-employed workers sidestepping PAYE and Class 1 NIC through payroll by simply working through a personal service company (PSC). The target was so-called ‘disguised employment’. The introduction of IR35 reform on 6 April 2021, saw the responsibility for assessing status shift from the contractor to the medium or large business engaging them. As part of this reform, which mirrors changes introduced in the public sector in 2017, the liability also shifted from the contractor to the fee-paying party in the supply chain (either the recruitment agency or client).

High profile cases such as this of Chiles and also notably that of Lorraine Kelly, helps highlight the continued confusion over IR35 reform and the clarification of the “self employed” status. Scepticism amongst contractors continues to grow with a recent survey of more than 1,200 contractors, nearly two-thirds (61 percent) highlighted IR35 reform as the “biggest threat” to their business. Andy Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE), claims that IR35 is a “forgotten crisis” and that wholesale change needs to take place on a societal and legislative level if the contractor sector is to return to a healthy state.

One of the challenges of IR35 is that there is no single definition of employment status for tax purposes. Instead, it is necessary to consider a number of factors together. Historically, HMRC has focused on three factors: whether there was personal service between the individual contractor and the engaging business and whether the individual could provide a substitute, the level of control that the business had over the individual and whether there was mutuality of obligation between the parties. In the Chiles’s case, the tribunal decided that although there was sufficient mutuality of obligation, no right of substitution and a level of control, it was necessary to ‘stand back and look at the circumstances as a whole’ and in particular, the most significant factor that might displace the prima facie case that Chiles was an employee, whether he was “in business on his own account”. The factors that confirmed Chiles was in business on his own account included the number of clients he worked for and commercial projects he took on that did not bear fruit. Chiles also paid 15% of his income to his management company Avalon to advance his career and reputation.

Although Adrian Chiles’ victory will no doubt be welcomed by contractors using PSCs, it only highlights the difficulties for businesses trying to apply the risks and manage the IR35 tax risks. We are also not yet able to take the case as a useful precedent as it is highly likely that HMRC will appeal.

If you are concerned about IR35 either as a contractor or an employer, contact Dan Insley or your usual Whittles contact.