Kye Burchmore is Director of Trinity Tax and the author of Bloomsbury Professional's Off Payroll Tax Handbook.
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Adrian Chiles must take his IR35 battle with HMRC to the tax tribunals for a fourth time! As the judgment of the Upper-tier Tribunal is handed down, the judge lays bare some of the failings of IR35 before remitting the case back to the First-tier Tribunal.
The unfortunate point of interest in this case is not really the legal principles it considers as it largely follows the Court of Appeal decision in Atholl House Productions [2022], but rather how complicated and burdensome IR35 can be on the taxpayer.
During the period under appeal (2012-17) Mr Chiles provided his services to ITV and BBC through his personal service company, Basic Broadcasting Limited. HMRC challenged his engagement under the IR35 legislation claiming £1.7 in liabilities and in 2019, there was a hearing at the First-tier Tribunal.
The judge from the first hearing however contracted long-covid and was unable to write the decision, leading to another hearing in 2021.
Basic Broadcasting were successful, but in another unfortunate turn of events for Mr Chiles, the First-tier Tribunal relied upon the Upper-tier case of Atholl House Productions. That case was however subsequently overturned by the Court of Appeal casting doubt on the Basic Broadcasting decision.
HMRC therefore successfully appealed to the Upper-tier Tribunal who confirmed the First-tier had erred in law and it was necessary to remit the case back to the First-tier for yet another hearing.
To rub even more salt in this wound, the Upper-tier also confirmed that the Court of Appeal changed the legal principles of what information is relevant for the enquiry meaning that Mr Chiles will now be tasked with establishing new facts from his working relationship of 14 years ago. The judge acknowledged the impact this will have on Mr Chiles:
“The toll which this prolonged appeal process has already taken on Mr Chiles is significant, and was described by him in a powerful witness statement which we have considered again and with care in preparing this decision. This has caused us great concern, both at the hearing and subsequently, in relation to procedural unfairness.”
Whilst it is procedurally unfair, the judge confirmed that because the case is being remitted for a fresh hearing, it will be bound by those new legal principles.
If ever there was proof that IR35 is overly complicated making it near impossible for the taxpayer to have certainty over their position, this case encapsulates it perfectly.
The judge points out that IR35 uses the Ready Mixed Concrete case from over 50 years ago and yet it “continues to be in a state of flux”. We are still awaiting the decision in HMRC v Professional Games Match Officials to determine what is meant by mutuality of obligation, and the meaning and significance of when someone is in business on their own account is still evolving as per the Atholl House case in 2022 even though that was introduced in the Montreal v Montreal Locomotive Works Ltd in 1947!
“Presented with this moving target, taxpayers and their advisers must nevertheless grapple with whether the legislation applies to any particular engagement, and the courts and tribunals must do the same”
For Mr Chiles, the overly complicated nature of applying IR35 results in 4 tribunal hearings, a potential liability of over £1.7m, substantial legal fees (which are ongoing), over a decade of arguing this with HMRC and quite possibly reputational damage. These issues were observed by the tribunal judge:
“behind every personal service company is a person, and, as we have seen in this case, the uncertainty and financial exposures generated by the difficulty in establishing a clear and stable legal position continue to produce a very real human cost.”
When a tribunal judge applies the law incorrectly, because it relied upon a judgement from the Upper-tier Tribunal which was subsequently found to be incorrect by the Courts of Appeal, it is fair to say –the taxpayer has no chance.
As a side note to all this unfairness, the case did consider some important legal issues but did not stray far from the already established case law.
The Upper-tier Tribunal found that the business on your own account test is not a different test to the third stage of the Ready Mixed Concrete test (provisions consistent with an employment relationship) and instead can be used as a way of answering that question.
It reiterated that the existence of a ‘business’ outside of a specific contract is an important contextual circumstance for establishing whether IR35 applies, but it is no more than that. One can be in business on their own account outside of their engagement, but that engagement still be one of employment. What happens outside of an engagement, does not necessarily alter the terms of that engagement.
Last of all, the tribunal considered the limits on what factors should be taken into account for formulating the hypothetical contract needed for IR35. The judge held that factual circumstance known to both parties should be take into account, but factual circumstance that is not known (or reasonably available) to one party, cannot be taken into account. This follows the Atholl House decision and seems a little obscure if applied broadly. If it is a factual circumstance, it should not matter if it is not known to one party, because it is fact and in theory, should be capable of being replied upon.
