The Changing Face of IR35: Atholl House and Kickabout in the Court of Appeal
How to determine employment status has, for many years, been a controversial and surprisingly difficult question. The distinction carries important financial consequences for many taxpayers, both for those engaged directly by another company or in the context of those working through their own personal services company (PSC) who may fall within the intermediaries legislation, commonly known as IR35.
In spite of other amendments in recent years (principally to shift the responsibility from the PSC to the end-client in the public sector and for medium and large businesses in the private sector), the core of IR35 has remained largely unchanged since its inception. It applies where an individual personally performs work for a “client”, but under arrangements involving a third party (typically a PSC), rather than under a contract directly between the individual and the client. There is then a three-stage analysis:
First, find the terms of the actual contractual arrangements and relevant circumstances within which the taxpayer worked.
Second, ascertain the terms of the “hypothetical contract” posited by the legislation – i.e. the contract which would have existed if the taxpayer had worked on the same basis directly for the client rather than through the PSC.
Third, consider whether the hypothetical contract would be a contract of employment. Only if this is the case does the taxpayer fall within the scope of IR35 and is taxed accordingly.
The issue of employment status lurking in the third stage has recently been addressed in two separate judgments of the Court of Appeal (CA) concerning radio presenters - namely Revenue and Customs Comrs v Atholl House Ltd [2022] EWCA Civ 501 (which concerned Kaye Adams’ work for the BBC) and Kickabout Productions Ltd v Revenue and Customs Comrs [2022] EWCA Civ 502 (which concerned Paul Hawksbee’s work for Talksport). The two judgments were released on the same day by an identically constituted court. Together, they hint at a change in approach for future IR35 disputes.
The Test for Employment Status
The first important conclusion is in relation to the mechanics of the employment status test. As Sir David Richards noted in the leading judgment in Atholl, “[i]t might be supposed that, and it would certainly be desirable if, there were one clear test or approach for determining whether a person was an employee". Amid some uncertainty as to the exact standard that needed to be met, courts and tribunals have tended to reach for MacKenna J’s classic three-point formulation in Ready Mixed Concrete Ltd v Minister of Pensions [1968] 2 QB 497 that:
"A contract of service exists if these three conditions are fulfilled. [i] The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. [ii] He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master. [iii] The other provisions of the contract are consistent with its being a contract of service."
Although this is certainly helpful, it contains substantial ambiguities of its own. The first relates narrowly to the function of the third stage. What actually falls within its scope? The second relates more generally to its interaction with the more impressionistic “test” of whether the taxpayer “was in business on his own account" suggested in Hall v Lorimer [1993] EWCA Civ 25 and successor cases.
In Atholl House, the CA reviewed the authorities in considerable detail and came to three conclusions with far-reaching implications:
- Ready Mixed Concrete and Hall v Lorimer do not establish different tests for employment status. They are, instead, broadly different ways of expressing the same overall assessment. Both recognise mutuality of obligation and control as necessary – but not necessarily sufficient – pre-conditions to a finding that a contract is one of employment as well as the need for an overall assessment of relevant factors.
- If a taxpayer is on business on their own account, it will generally follow that they are a self-employed contractor. It is therefore a “useful” formulation but not necessarily a sufficient one.
- The factors to which a court or tribunal may have regard when assessing whether a contract is a contract of employment or a contract for services are not confined only to the terms of the contract and the effects of those terms. In accordance with standard principles of contractual interpretation, that assessment should be made in light of the facts and circumstances which existed at the time the contract was made and which were known or reasonably available to the parties. This may include whether the service provider is known to carry on a business, profession, or vocation on their own account as a self-employed person although the weight to be attached to such a factor is a matter for the fact-finding tribunal.
The CA’s analysis reaffirms the nuanced and multi-factorial approach which underpins the determination of employment status rather than the more formulaic approach recently adopted by HMRC. Ready Mixed Concrete is helpful in providing the structure for an analysis of the necessary elements but is not simply a three-part test to be applied rigidly and mechanistically. This will certainly be welcomed by some for its apparent injection of common-sense into an assessment that has often been highly legalistic. Atholl House clarifies that the court will be able to consider the taxpayer’s historic pattern of work, for example, at the third stage as well as the degree of control exercised already considered earlier in the test. In this way, the three elements of analysis may become increasingly blurred.
Although this is beneficial in many respects, it will also make the overall assessment more impressionistic and therefore potentially more uncertain.
Don’t Ignore the Real Contract!
Aside from clarifying the nature of the test itself, the CA in Atholl House and Kickabout also clarified how the assessment of employment status under the hypothetical contract relates to the actual terms of the “real contract”.
Kickabout demonstrates the importance of this in practice. The taxpayer argued that the contracts with Talksport did not, on their literal wording, suggest that Talksport was strictly obliged to offer Mr Hawksbee any set amounts of work and therefore that there was no mutuality of obligation. The CA rejected this argument and agreed with the Upper Tribunal that the only conclusion which made sense in the context of the contract as a whole was that there was an obligation on Talksport to offer the number of programmes that Mr Hawksbee was required to present. Among other considerations, the fact that another clause provided for Mr Hawksbee to be suspended in cases of misconduct made no sense unless it was accepted that there was otherwise a continuing obligation to provide work.
Recent cases have also made it increasingly difficult for taxpayers to argue that the requirement for control as per the second stage of the Ready Mixed Concrete is not satisfied. A theoretical right (or framework) of control has been held to be sufficient. In many cases, the commercial reality of even the most contractor-like arrangement dictates that a contract provides for far-reaching rights of control over how an employee performs his or her job even if these controls are only intended to be used in extremis or not at all.
In order to get around this, taxpayers have previously sought to draw on the employment law decision in Autoclenz Ltd v Belcher [2011] UKSC 41 to argue that the relative bargaining power of the parties needs to be taken into account in deciding whether a particular term in an agreement represented the “truth” of the agreement or merely a pro forma distraction. The CA appears to have shot down this line of argument by concluding that the Autoclenz doctrine is relevant only in the context of the interpretation of certain employment law statutes and is not a generally available principle for interpreting employment contracts in contexts such as IR35.
In Kickabout, the CA re-affirmed that the existence of a right of control is to be determined by the party’s contractual rights and not by taking a “realistic” view of the situation. On the facts of the particular case, the fact that Mr Hawksbee retained considerable autonomy over his show did not negate Talksport’s overall control on the content in spite of the scope of the discretion left to him in practice.
Even more than before, Atholl House and Kickabout reaffirm the importance of making sure that very careful consideration is given to the specific wording of existing contractual documentation as part of the IR35 analysis on setting up an arrangement. Nonetheless, there may be a widening gulf in this sphere between wording which is commercially necessary and wording which is tax efficient. This will be a difficult line to tread.
Conclusion
Overall, Atholl House and Kickabout point towards a very different focus in future IR35 disputes. They re-affirm the importance of the precise content and scope of the contracts at issue. Further, if there is a dispute with HMRC, much of the argument between the parties is likely to focus on the more impressionistic, multi-factorial assessment in the third stage of the Ready Mixed Concrete test.
