Gary Lineker is the latest high-profile personality to be pursued by HMRC in the courts for a reported (according to HMRC) £4.9m unpaid tax bill, over a five-year period, mainly in relation to his presenting duties on the BBC’s flagship football (soccer…) show, Match of the Day.

Gary Lineker files his tax return on the basis that he is a “Self Employed” presenter, meaning that he has a “contract for services” with the BBC and not a “contract of service”, the latter meaning that he would be regarded as an “Employee” of the BBC.

If he were regarded as an employee, there would be a much higher tax liability to pay on Mr Lineker’s salary.

Currently, (it is argued) Mr Lineker reduces his tax liability because, instead of being paid a salary (as an employee) from his BBC presenting duties, which would result in him paying 45% income tax and a large National Insurance liability, he draws his salary from his “Personal Service” company in the form of dividends. Dividends are not subject to National Insurance Contributions (NICs) and suffer income tax at lower rates.

Legislation

The rules were enacted in April 2000 (and are currently found at ITEPA 2003, Pt 2, Ch 8) to counteract the situation where, for all intents and purposes, an individual is an “employee” of a company but takes steps to provide their services via a Personal Service Company (PSC), thus securing a reduction in tax and NICs as set out above.

This practice of providing services through a PSC became so widespread in the late 1990s that HMRC felt that it needed to act.

In recent years, there has been a radical change in the legislation. The “off-payroll” legislation applies to PSCs providing “deemed employment” work to end-user/engager and has been operating in the “public sector” since 6 April 2017 and the “private sector” since 6 April 2021. The off payroll rules effectively mean that the engagers must deduct and account for PAYE and NICs from their payments to PSCs.

However, the off-payroll rules do not apply to small companies, meaning that it is still the obligation of the PSC to deduct the PAYE/NIC and pay this across to HMRC.

To fall outside the IR35 rules it must be shown that the worker would be “Self Employed” (when the employment tests are considered in relation to the relevant engagement) and not employed. HMRC provides guidance for this at IR35. There is currently no statutory definition of what constitutes “Employed” or “Self Employed” and therefore case law needs to be relied upon.

Conditions for the Company

A PSC is regarded as a relevant intermediary and thus falls within the IR35 rules where the worker:

●    has a material interest (broadly owning 5% of the company’s ordinary share capital) in the company; or
●    receives a payment from the company that is not employment income but could reasonably be construed as such (ITEPA 2003, S51(1)).

Controversial Rules

To say that the rules are universally unpopular would be an understatement. The difficulty of applying the rules consistently is incredibly troublesome and HMRC do not seem to have a clear view of how they should be applied. This creates uncertainty and leaves genuine contractors (i.e., nonemployees) as vulnerable to a possible enquiry down the line and, in some cases, significant tax liabilities.

The tests in brief

There are several tests that HMRC and the courts will apply to determine whether a worker providing services through a PSC is caught by IR35 (i.e., they are in fact really an employee of the entity their PSC is contracted by), and therefore will have extra tax and NI to pay. These main tests are set out (briefly) below.

i) Control

HMRC tends to place a lot of emphasis on this aspect of the worker’s relationship. Essentially, does the company receiving the services effectively control everything that the service provider does? Who provides the service? When and how? If the company has such control, then this would indicate that the relationship is one of Employer and Employee.

ii) Mutuality of Obligation

Does the service provider expect to be provided with work on a consistent basis and, equally, does the service receiver provide work on a consistent and repetitive basis? If so, once again, we are looking at a relationship of Employee and Employer.

iii) Substitute

Does the service provider have the right to send a substitute in his or her place? If not, then this will be seen as indication that the relationship is, once again, one of Employee and Employer.

It should be noted that none of the above tests are superior (although control does seem to carry more weight), or can be taken in isolation – everything is decided in the “context of the facts”.

iv) In business on own account

The overriding fact which the courts have sought to establish is whether an individual is in business on their own account. The key distinction being whether the work is being provided under a

• contract of service (i.e Employee); or
• a contract of services (i.e. Self Employed).

As there is no definition of “Employed” or “Self Employed”, one has to turn to case law. The cases are too lengthy to analyse in detail, but two notable cases provide good guidance as to the terms of what is deemed to be Employed and Self Employed.

Ready Mixed Concrete v Minister of Pensions and National Insurance 1968 2 QB 497

Justice Mckenna concluded that an employment contract exists if all three following conditions are satisfied:

1. 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;
2. 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
3. the other provisions of the contract are consistent with its being a contract of service.

Lime-IT Ltd v Justin (Officer of the Board of IR) 2003 (SSCD) 15

The Special Commissioners held that the following factors were a good indication that an individual could be classed as “Self Employed”:

1. the client contracted for specific projects;
2. no significant control was exercised over the worker;
3. monthly invoices were rendered with 30 day terms of payment;
4. the PSC had to provide its own computer equipment;
5. there was a genuine right of substitution; and
6. the worker was not found to be “part and parcel” of the client company’s organisation.

v) Provision of equipment or premises

The more equipment or premises provided by the worker, then the more it is likely that the worker will be regarded as Self Employed.

vi) Financial Risk

The degree of financial risk an individual takes with their business is an indication of self-employment. If their own money is invested in the business and there is a genuine possibility that they may not recoup their outlay, then this would be an indication of self-employment.

News Readers

In 2019 HMRC was victorious in the courts, by successfully arguing that three newsreaders, Tim Willcox, Joanna Gosling and David Eades, were in fact employees of the BBC and not self-employed contractors as they claimed to be.

This was an easy win because during HMRC’s enquiry into the newsreaders, it transpired that the BBC had informed certain newsreaders that if they didn’t resign as employees and offer their services through a PSC they would no longer be provided with work from the BBC. However, everything in their contracts pretty much stayed the same, so in fact the newsreaders were originally employees of the BBC and were still employees of the BBC even though they were now offering their services through a PSC – something of an own goal.

HMRC litigation successes and failures

Recent high-profile cases litigated by HMRC against Adrian Chiles and Kaye Adams have ended in defeat, the taxpayers successfully arguing that they were not employees and therefore genuine contractors.

Uncertainty

The different outcomes in the newsreaders/Chiles/Adams judgements have created uncertainty and unease (particularly in the tax profession), not least because, on the face of it, the facts are very similar: journalists anchoring TV shows.

The uncertainty of how HMRC seeks to enforce the legislation makes it very difficult for tax advisers to provide robust advice around IR35.

Two cases that were litigated prior to the Chiles/Adams cases were Lorraine Kelly and Eamon Holmes. Again, two TV presenters who, it appeared, carried out exactly the same duties. But no, HMRC won against Holmes but lost against Kelly.

IT ALL TURNS ON THE FACTS.

Lorraine Kelly – Taxpayer Wins

Kelly successfully argued that she was not an employee; The First Tier Tribunal (FTT) considered a range of tests under the IR35 legislation, the judges (to their credit) considered in detail the arguments and evidence. The fact that Kelly had numerous engagements outside her ITV work seemed to be a strong factor in the judges concluding that her ITV work fell outside IR35. Other notable facts considered by the FTT were:

• she was completely free to conduct the “Lorraine” Programme in any way she saw fit;
• there were no restrictions from ITV – ITV would have had an overview of what the format of the programme was likely to be, but ultimately it was Ms Kelly’s say so as to what was to be aired (although put to the test it seems unlikely they would have allowed absolute carte blanche…); and
• Ms Kelly was not entitled to sick pay, holiday pay or other employee benefits, all of which also led the FTT to find that she was not an employee.

Eamon Holmes – Taxpayer Loses

Holmes unsuccessfully argued that he was not an employee because:

• he signed a contract on an “exclusive” basis which included specific dates and was asked to be as flexible as possible if there were to be any changes;
• he did not have the right to send a substitute, if he were ill then ITV would provide the substitute;
• Mr Holmes argued that he did his own research and only followed the script for 10% of the time and that ITV engaged him for his “USP and Profile”, which the court seemed to ultimately reject;
• Holmes was paid a fixed fee for each programme and got additional benefits which presumably the FTT held as similar benefits to what an employee would receive; and
• the FTT held that, based on the facts, there was a sufficient mutuality of obligation and apparent control to deem the relationship between ITV and Eamon Holmes as one of employment.

Overall, the FTT ruled that even though Mr Holmes had some leeway in the way the engagement was carried out, there did seem to be an element of control implied in the contract, which consequently meant that he was to fall within the IR35 rules and be treated as an employee.

So, the key Test in all of these cases seems to be: who controls the individual? Is it the organisation (e.g. broadcaster) engaging them, or do they have sufficient autonomy over their own affairs and the output they produce? Even though it seemed to be the case that ITV had no control over how Mr Holmes delivered his content, it did have full editorial control (which seems to be the distinguishing factor with the Kelly case).

How does this apply to Mr Lineker?

Hopefully for Mr Lineker, his contract with the BBC for Match of the Day will be similar to Ms Kelly’s rather than Mr Holmes’.

It seems to me that, as with all of the celebrity presenter cases, it will come down to whether the BBC “control” Mr Lineker through the editorial being shown to the viewer or whether Mr Lineker is being engaged for his professional opinion thus giving him creative freedom.

As Mr Lineker is a successful ex-professional footballer, I presume that this is what his barrister will argue, and if the courts are inclined to go with this argument, I can see Mr Lineker being successful. It may be, however, that the test of Mutuality or Substitution may take precedence, because everything turns on the facts. So it’s anyone’s guess as to how this turns out.

Ultimately, and unfortunately for taxpayers and advisers alike, the uncertainty around IR35 will reign for some time yet.  However, some comfort should be taken from the Lorraine Kelly case and similar ones where it can be seen that the courts really do consider all of the facts carefully and decisions are reached using a reasoned approach.

For further detail on IR35 rules, please contact Des Hanna in our International Tax team on 07941 655 579.

Des Hanna
International Tax Director
M: +44 (0)7941 655 579 or
E: des.hanna@uk.Andersen.com