In this article, Emma Bird – Tax Transactions Director at Wilson Wright, part of BKL since April 2024 – explores the off-payroll working rules (IR35) that apply to many contractors and freelancers, including TV presenters.
Historically, contractors and freelancers have operated through a private company to enjoy a better tax treatment compared to sole traders — but a more favourable tax position is never guaranteed because of the off-payroll working rules known as IR35.
According to IR35, if a contractor or freelancer has a working relationship with a client that is more akin to regular employment, that worker should pay income tax and National Insurance Contributions on their income, rather than the more generous corporation tax. This is called ‘deemed employment’.
Working out whether you or your contractor are deemed employees can be difficult. At first, the responsibility for determining employment status fell solely on the worker themselves. However, reforms in 2017 for the public sector and 2021 for the private sector shifted this burden to the client engaging a contractor’s services, where the client is deemed to be of the appropriate size.
HMRC estimates 130,000 workers are likely to have been affected by the 2021 reforms. It is essential that both contractors and clients understand how to comply with off-payroll working rules and what happens when it goes wrong.
Whether you are a contractor yourself or hiring someone to carry out work for you, making mistakes can lead to time-consuming tax investigations and costly penalties.
Who determines IR35 status?
These days, the client (or ‘deemed employer’) is usually responsible for determining the worker’s IR35 status. However, there are exceptions to this rule.
For example, if a contractor provides services to a small private sector client, the contractor’s intermediary must determine their employment status instead. (An ‘intermediary’ under IR35 might be the contractor’s own limited company.)
Different factors are used to assess whether someone falls within the boundaries of IR35 or not. These include:
- Substitution: could you send a substitute to do your work?
- Control: do you have autonomy over how, where and when you work?
- Mutuality of obligation: can you choose whether to accept work or not, and can your client choose whether they provide it?
- Risk: do you take on the financial risk of the arrangement?
- Equipment: do you provide your own equipment to do the job?
- Payment: are you paid once the project is complete (rather than on a regular basis)?
- Number of clients: are you able to have multiple clients at the same time?
These are just a few of the factors that might make a difference to your determination. It is important to seek advice to confirm the details and to avoid unnecessary penalties.
HMRC investigations
If you determine that you fall outside the scope of IR35 but HMRC think off-payroll working rules could apply, HMRC may launch an enquiry.
In this case, HMRC will send you an initial letter asking for:
- The reasons you have determined IR35 does not apply to you
- A breakdown of your business income for that tax year
- Copies of all your written contracts for work in that same year
If you provide ‘adequate evidence’ that you fall outside IR35, HMRC will close the enquiry. However, if HMRC still believe IR35 may apply, you may receive another letter to schedule a face-to-face meeting.
These meetings are generally not compulsory. It might be better to offer to answer any questions they might have in writing.
Speaking to HMRC in person can sometimes help to resolve a matter more swiftly. However, it is important to seek advice from a professional adviser before you proceed and often we recommend a professional adviser attends with you.
HMRC’s decision
At the end of the enquiry, HMRC will issue an opinion on whether you have complied with IR35 or not.
If you disagree with HMRC’s ruling, you can object and the tax authority will take your reasoning into account before making their final decision on your case. After that, you can choose to appeal against the decision and take the matter to a tribunal.
As with any tax investigation, it is important to seek professional advice as soon as possible, especially if you disagree with HMRC’s verdict. If HMRC find that you fall within the scope of IR35, you will need to pay the corporate tax you owe, as well as any interest accrued on these amounts.
Depending on your case, you may also need to pay a penalty — for example, if you failed to take ‘reasonable care’ in determining your employment status. You could also receive a more severe penalty if HMRC find that you deliberately misled them.
If you get IR35 wrong as a client
It is vital to take reasonable care when determining a contractor’s IR35 status, and you will need to issue a status determination statement (SDS) when you make your decision.
If you incorrectly determine that a worker falls outside IR35, but HMRC decide that the worker falls inside IR35, you may become the subject of a tax investigation.
Some companies take a blanket approach to these rules to avoid triggering an investigation. However, it is important to look at each contract individually.
For example, if you say a genuine contractor or freelancer is inside IR35, they could end up paying more tax than they need to — which, in turn, could do damage to your business’s reputation.
Handling disagreements
Unfortunately, disagreements between contractors and clients can happen. If a worker challenges your decision as a client, you should consider their reasons for disagreeing with your determination. After that, you will need to either maintain your determination or provide a new one.
Once you’ve been notified of the disagreement, you will have 45 days to respond with your decision. Until then, you should continue applying the rules in line with your original determination.
How to get IR35 right
Navigating off-payroll working rules can be complicated, but there are a few things you can do to avoid getting it wrong.
As a client, you will need to ensure your process for determining employment status is watertight. Reviewing each contract on a case-by-case basis can make it easier to stay in line with IR35 legislation.
It is also a good idea to speak to your employees and contracted workers about off-payroll working rules to make sure they understand how to comply.
If you are a contractor, you should review your contracts and working practices from the outset, paying attention to the list of factors above. For example, bringing your own computer or other equipment to the job, or not working fixed hours, might help you stay outside the legislation. This can also help you build up a robust defence if HMRC do launch an enquiry.
IR35 and the media industry
Laws that govern the relationship between a client and contractor are especially relevant in the media industry. By nature, a lot of film & TV work requires individual specialists to work for short periods, so the sector has always depended on skilled contractors.
Recent years have brought several tax tribunal cases involving HMRC, TV presenters and the IR35 rules. Find out more in our articles exploring these cases:
Gary Lineker and the BBC
‘HMRC, on investigation, concluded that the BBC’s concerns had been well-founded: if it had contracted directly with Mr Lineker instead of with the partnership, that would have been a ‘contract of service’. Therefore, HMRC said, IR35 rules applied and the partnership was required to account for, broadly, the PAYE and NIC that would have been payable had there been a direct contract.
Usually in such cases the argument between the parties is as to whether the notional direct contract would have been a ‘contract of service’. But in this case the First-tier Tribunal (‘FTT’) didn’t get as far as considering that issue. It decided the case on different grounds.’
Alan Parry Productions Ltd: a deemed employee
‘The main takeaway from this case is to underline the importance of careful drafting of the written contract, ensuring that it reflects the way in which the parties intend their relationship to operate in practice.’
Adrian Chiles and Basic Broadcasting Ltd: status issues
‘The Tribunal was satisfied that there was, prima facie, an employment: but was it contradicted by other circumstances?’
Kaye Adams and Atholl House Productions Ltd
‘Much of the case, including the application of the usual ‘mutual obligation’ and ‘control’ tests is familiar, though their application to particular cases has been shown to be so much dependent on the weight given by different tribunals to what are often fine differences in facts as to make the cases of little value as precedents.
What is of far more interest is that although the Upper Tribunal held that the degree of control held by the BBC was enough to justify the prima facie conclusion that Ms Adams would have been an employee, that was not an end to the matter.’
Paya and others v HMRC: a BBC case with a sting in the tail
‘The hearing of the case before the Tribunal took place over no less than eight days; the report on the substantive point ran to 157 pages and came out 16 months after the hearing; and even after that degree of attention the two members of the Tribunal disagreed as to the correct analysis. Against that background, for HMRC to assert that the advisers were careless in failing to recognise that IR35 applied is simply beyond ridiculous.’
Christa Ackroyd and Lorraine Kelly: spot the difference
‘Within a year, two TV presenters in ostensibly rather similar circumstances – both operating through personal service companies – ended up coming away from the First-tier Tribunal with very different results.
Either case could, perhaps, have gone either way and might have done so on a different day. Such a lottery is no way to run a tax system.’
The varying outcomes to these cases highlight the complexity of the IR35 rules, and the value of seeking professional guidance if you’re a freelancer or contractor in the media industry.
How BKL can help media contractors
Our music, media, entertainment and sport team include highly experienced specialists from Alan Heywood & Company, who joined BKL in March 2024. Together, we have decades of expertise supporting people, groups and organisations across the sector.
We can help you to ensure that you comply with the IR35 and off-payroll working rules, and to advise you in the event of an HMRC enquiry.
Our assistance for TV & film clients has included a TV presenter where there was a dispute with the production company over the presenter’s IR35 status. Following a review of the agreement between our client and the production company, and a detailed analysis of the IR35 legislation, it was agreed that our client would be treated as a contractor rather than an employee.
Contact us today to find out more about how we can help you.