In recent years, the term ‘IR35’ has been batted around courtrooms and social media. From the BBC to X, celebrity IR35 cases create intrigue and outrage. Presenters like Gary Lineker, Adrian Chiles and Lorraine Kelly have all found themselves in HMRC’s crosshairs over it.
What is IR35?
IR35 was born on 9 March 1999 when the Inland Revenue (now HMRC) issued Press Release 35 laying out the basis for new tax avoidance legislation effective April 2000. IR35 closed a loophole where someone on PAYE could leave employment on Friday, set up a Personal Services Company (PSC) over the weekend, and return to the same job on Monday as a contractor but pay less income tax and National Insurance (NI). For some, the benefit of having a PSC to disguise employment and increase take-home pay was worth foregoing sick pay, holiday entitlement, and employee perks. Moving an employee to contractor status is cheaper because there are no NI or pension contributions to pay.
What Qualifies as IR35?
Although there is no statutory definition of what disguises contractors as employees, there is an obligation to exercise ‘reasonable care’ in determining IR35 status. Key indicators of being a contractor and legitimately working outside of IR35 include 1) you can be substituted with another contractor, 2) you control your work and how it is performed, 3) you can work for other companies and are not mutually exclusive, 4) you can make a profit or loss, and 5) you do not receive the same perks as employees.
Sole traders are outside of IR35 because they provide services directly instead of through an intermediary company. Working inside IR35 (off-payroll worker) means you are acting as a contractor but should be classed as an employee and subject to PAYE.
Getting IR35 Wrong
When IR35 was first rolled out, liability for an incorrect determination rested solely with the PSC, which could be hit with a debt demand amounting to 30-100% of the unpaid tax. This liability was passed on to public sector organisations in 2017 and private sector firms in 2021 (excluding SMEs). If an employer makes an incorrect determination, they are now solely liable for the employee’s income tax and both types of NI. HMRC does not contra the tax already paid by the PSC. HMRC’s Check Employment Status for Tax tool has itself come in for criticism, with 20% of assessments returning inconclusive determinations. To avoid falling fowl of IR35, some businesses and public sector organisations have stopped using PSCs entirely. SMEs remain exempt from determining the IR35 status of contractors.
Compliance investigations start with a single letter seeking information. HMRC’s next step is to request a face-to-face meeting to answer specific questions, but most firms decline in favour of providing written answers. HMRC can approach other contracted parties linked to the matter before making an IR35 determination, either confirming compliance or making a demand for retrospective tax and NI. HMRC offer two options for appealing their determination. The first is mediation through Alternative Dispute Resolution, and the second is proceeding to a First Tier Tribunal where both parties present their case in front of a judge.
HMRC V Gary Lineker Media
Presenter and former professional footballer Gary Lineker is the highest-profile celebrity so far to have taken HMRC to a tribunal over IR35. Having launched their investigation in 2018, HMRC determined Lineker should have been an employee of BT Sport and the BBC for all three contracts covering his 2013-18 presenting duties. Lineker had contracted both broadcasters through Gary Lineker Media (GLM), a partnership formed in 2012 with his then-wife. When HMRC’s investigation concluded, they hit GLM with a £4.9m debt demand comprised of £3.6m in income tax and £1.3m in NI. The tribunal was heard in front of Judge Brooks in February 2023. Lineker maintained that GLM was outside of IR35 and had paid more income tax and NI than if he had used a limited company.
Current legislation considers a partnership as an extension of being a sole trader and, therefore, outside of IR35. HMRC’s case and claim to Lineker’s £4.9m hinged on proving GLM was not a valid partnership. On hearing testimony and studying the signed partnership agreement dated 17 October 2012, Judge Brooks determined GLM was valid and operating correctly outside of IR35. HMRC has since filed an appeal, presumably because it has set a precedent of using a partnership in determining IR35 status. Even if GLM had been a limited company with its own independent legal identity, the multiple and non-mutually exclusive fixed-term contracts still lean in favour of it being a contractor and not a disguised employee. Lineker’s spat with the BBC over its impartiality rules for social media adds fuel to the fire that contractors are free to air their views, whereas employees are not.
HMRC V Celebrities
Lineker is not the first, nor the last, to find himself in the crosshairs of HMRC and IR35. The tarnish of an IR35 investigation takes time to polish out, even when proven innocent. Television personality Lorraine Kelly and her company Albatel Limited faced a £1.2m tribunal ruling in 2019 with Judge Dean finding against HMRC on two accounts. The first is that Kelly had editorial control over hosting and presenting her shows, including the hours worked and the people interviewed. The second is Kelly is deemed a ‘theatrical artist’ and is contracted to perform as a version of herself for entertainment purposes.
Television presenter Adrian Chiles and his company Basic Broadcasting Limited (BBL) were exonerated in 2022 by Judge Cannan after a seven-year IR35 investigation. A key factor was the BBC and ITV contracts giving Chiles near autonomy over how he performed his work. The tribunal also heard that BBL was operating as a self-sufficient business, providing a range of other services to dozens of other organisations. Former rugby player turned commentator Stuart Barnes and his company S & L Barnes Limited won at tribunal against HMRC in 2023. Judge Poon acknowledged the company had multiple income streams and sighted the ad-hoc nature of work with Sky TV as a key factor in her ruling. In recent years, BBC Look North presenter Christina Ackroyd and ITV presenter Eamonn Holmes have both lost IR35 tribunals on the grounds of not having full control over their workload.
Analysis of HMRC’s successful IR35 tribunals points more towards appellants having obtained incorrect advice than it does an intent to evade tax.
There is nothing to imply Lineker, Kelly, Chiles, Barnes, Ackroyd, and Holmes actively sought to avoid paying tax in contracting through their PSCs.
Implications of IR35
According to Lord Bridges, the implementation of IR35 has generated £1.5bn each year, which is twice the original estimate. For HMRC, this is vindication and proof that compliance has improved. What it doesn’t reflect is the number of contractors forced into going PAYE to maintain their income because companies are afraid of being caught in HMRC’s crosshairs. When factoring in other tribunals involving high-net-worth individuals, HMRC has lost 66% of cases contested. IR35 operates as a debt to be collected once determined by HMRC. The logic behind pursuing Lineker, Chiles, Kelly and Barnes does not stack up.
HMRC funds legal counsel with taxpayers’ money. Those on the receiving end fund their own litigation at considerable expense. Specialist IR35 barristers are not available from the middle aisle in Lidl! Going it alone without legal representation is akin to fighting Goliath armed only with a lollypop stick. As a matter of self-preservation, it can be cheaper for some businesses to concede and pay HMRC’s debt demand. Put simply, unless HMRC provides a statutory definition or an IR35 certification scheme to level the playing field, compliance and liability will continue to hinge on interpretation.