A weird world - this article was written for and first published in Taxation Magazine.
- HMRC wins an IR35 case at the First-tier Tribunal for the first time in several years.
- IR35 applies if, without the limited company, the worker would have been regarded as an employee of the client for income tax purposes.
- A TV presenter is engaged primarily for their personality and is expected to stamp their personality on the role.
- Was the reasoning of the First-tier Tribunal seriously flawed in this case?
- Ascertaining the terms of the hypothetical contract is merely a first step. The real question is whether it is a contract of employment.
- Where does the hypothetical contract end and what does it encompass?
Sometimes I read a First-tier Tribunal decision and think ‘that does not make sense’. Christa Ackroyd Media Ltd (TC 6334), which involves IR35 is one of those cases. IR35 was conceived as an anti-avoidance provision. It is aimed at situations in which an engagement is structured as the supply of a service, but the underlying services are those that an employee might be expected to be carry out. It applies only when ‘the circumstances are such that if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client’.
This works well if the type of work contracted for is normally (or often) carried out by employees, such as IT programmers, nurses, building labourers and the like. This is because one can look at what would be found in a typical contract of employment and compare the actual engagement with the corresponding employment. It works much less well when the services contracted for are unique and an employee would rarely, if ever, undertake them. Indeed, it seems questionable both whether it can be applied readily to such engagements and whether it was ever intended to apply to them.
The work of the TV presenter
Ms Ackroyd was a TV presenter, or host, or anchor (they all mean the same thing) for a BBC TV programme, Look North. She supplied her services to the BBC through her company, Christa Ackroyd Media Ltd (CAM Ltd).
HMRC was attempting to show that ‘TV presenter’ describes a particular type of role, but that is a fallacy. A TV presenter is engaged primarily for their personality and is expected to stamp their personality on the role. Take, for example, Naga Munchetty (BBC Breakfast), Gary Lineker (Match of the Day), Matt Baker (The One Show), Rob Brydon (Would I Lie to You), Graham Norton (The Graham Norton Show) and the host for the day on one of the endless repeats of Have I Got News for You. They are all presenters of BBC TV shows, but what they do is vastly different in every case. If it was not, they would be interchangeable. It is not necessary to watch very much TV to realise that would be impossible. Each has created their own niche and, if they move on, their successor will present the programme differently and perhaps with varying degrees of success.
In the months or years ahead, the First-tier Tribunal is likely to become bogged down with TV presenter cases precisely because they are all different. Even if the Christa Ackroyd Media case goes to appeal, it will not create a precedent because, inevitably, each presenter case will turn on its own facts. By now the law on what is an employment is clear; there are many decisions of the House of Lords, the Supreme Court and the Court of Appeal and a number in the lower courts that have been approved by the higher courts. The issue in these upcoming appeals is unlikely to be what is an employment (law); it will be whether their circumstances indicate an employment (pure fact).
The hypothetical contract
The First-tier Tribunal said that had Christa Ackroyd been engaged by the BBC she would have been an employee. I have no idea whether that conclusion is correct because the reasoning behind it seems seriously flawed.
I have always thought that the tribunal’s approach to IR35 is odd. It imagines a hypothetical contract and tries to discern part (but by no means all) of what it would have said. In a few cases, this is probably the only option. Contracts are rarely negotiated from scratch. One side, normally the employer or engager, has a standard contract and the parties tinker with a handful of the clauses that it contains. In Ms Ackroyd’s case, the BBC (so it insists on reiterating) does not force presenters into using companies; it is happy to employ them directly. It follows that the BBC must have a standard presenter employment contract and – in the hypothetical IR35 world – Ms Ackroyd would have negotiated changes to that. One would therefore expect the tribunal to demand to see that standard employment contract and then hear evidence as to the amendments that would have been negotiated. That is surely the rational way to approach the IR35 concept. Instead the First-tier Tribunal ignores real life and starts from a completely hypothetical world to discern a hypothetical contract that it then labels as representing reality.
Be that as it may, ascertaining the terms of the hypothetical contract is merely a first step. The important question is whether it is a contract of employment.
A contract of employment?
The tribunal started from the seminal case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance  2 QB 497 and McKenna J’s well known tests of ‘he agrees … 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; and the other provisions of the contract are consistent with it being a contract of service’. The tribunal then paraphrases this as ‘the right of control in respect of what is to be done, and where, when and how it is to be done is an important indicator of an employment relationship’. But why? None of those things are suggestive of a master-servant relationship. Indeed, in many, if not most cases, they are the essence of any contract.
If I want my house painted I, or to be precise, the contract determines what is to be done (paint the house), where it is to be done (at my house), when it is to be done (when I agree to be home) and how it is to be done (I don’t care that only one undercoat is normal, I insist on two). Yet none of that makes the painter my servant. It is simply the specification of the work he agrees to do. Similarly, I have no doubt that Ms Ackroyd’s contract (both the real and hypothetical ones) set out what was to be done (present a TV show), where (at the BBC studios), the time (when the BBC wished to broadcast the programme, which was a live one) or how it was to be done (in the manner she wished because the broadcaster was buying her personality). None of that said anything about whether there was an employment relationship.
As the name suggests, the Ready Mixed Concrete case related to the owner-driver of a cement lorry, so none of those features was significant there either.
Control and substitution
I have no doubt that in Christa Ackroyd Media Ltd Judge Cannan controlled the tribunal hearing – the rules require him to ensure its proceedings meet specific criteria – but that could not make HMRC’s barrister his employee! The tribunal went on to say that the significance of control is that the employer can direct what the employee does, not necessarily how he does it. It derived this not from a tax case, but from a child protection case which had to decide whether a priest was an employee of his church. This was looking at control in terms of accountability and supervision, not on whether a master-servant relationship existed. It is dangerous to take even Supreme Court decisions out of context. But even if one can, what right did the BBC have to direct what Ms Ackroyd did? Could the corporation say to her, ‘We don’t want you to present Look North today; we want you to read the news’? The tribunal thought that, under her hypothetical contract, it could, but it stretches credibility to imagine that she would have agreed to that and, because it is clear that the BBC was anxious to use Ms Ackroyd, it would surely never have sought to do that.
The tribunal also thought that the absence of the right to provide a substitute may suggest employment. It may, but it may equally suggest expertise or skill, which is a far more likely reason why the BBC would not have wanted Ms Ackroyd to send along someone else. In the same way, HMRC would, I suspect, have been horrified had Mr Adam Tolley QC sent someone else from his chambers to the tribunal hearing. The essence of the Revenue’s contract with him was that it wanted him and him alone, but that could not turn him into an HMRC employee.
The parties to the contract
The tribunal also put forward the odd proposition that ‘in identifying the terms of the hypothetical contract, the stated intention of the parties, in this case Ms Ackroyd, CAM Ltd and the BBC, cannot prevail over the true legal effect of the actual agreements’. This is odd because, by definition, CAM Ltd is not actually a party to the hypothetical contract and there are no ‘actual agreements’ because the hypothetical contract displaces any actual agreement that may be in place. Accordingly, unless the hypothetical agreement is accepted to follow one of the actual agreements (which was not the tribunal’s approach), the actual agreements are surely irrelevant.
The decision records: ‘Ms Ackroyd’s evidence was that she would never have entered into a contract with the BBC if it meant that the BBC would control the way in which she worked. However, we are concerned with the hypothetical contract. At most this has only marginal relevance in a finely balanced case as a statement of intent.’
Again, why? The hypothetical contract is one between Ms Ackroyd and the BBC. Had Ms Ackroyd not have been prepared to give the BBC the right to control the way she worked, the logical inference is that she would not in fact have given the BBC that right so the hypothetical contract would not have contained it. The BBC had no interest in controlling the way she worked; it engaged her services because it believed (rightly) that the way she would work would significantly improve the show’s ratings, so it would hardly have wanted the right to undermine their own objective.
The BBC guidelines
The tribunal also spent considerable time reviewing the BBC’s editorial guidelines which, it tells us, ‘encapsulates the value of the BBC and the editorial standards that every producer of BBC content is expected to follow’. The tribunal seems to have regarded Ms Ackroyd’s obligation to comply with those guidelines as indicative of control.
Again, why? The guidelines relate to the quality of what is produced, not how it is produced. Contractually requiring Ms Ackroyd to keep within the BBC guidelines when appearing on a BBC show is no more control than my requiring my house painter to use two undercoats. It is part of the specification of what her company (or, hypothetically, she) was being engaged to provide. I imagine that even the contestants on The Voice are required to meet these guidelines, but it would be fatuous to suggest that makes them BBC employees. It needs to be part of the specification because what is produced is of no value to the BBC if it is not capable of being broadcast. But that applies to everything that it broadcasts, including programmes it buys in from production companies.
The tribunal also placed emphasis on the fact that, in the pre-production meetings, the BBC decided the items that should be included in the show. So what? It was a BBC programme, not Ms Ackroyd’s. Her role was to take the items that the BBC wanted to include in its show and mould them together. The fact that the BBC chose the items for the BBC show says nothing about Ms Ackroyd’s services.
There’s the rub
To rub salt into the wound, after deciding that IR35 applied, the First-tier Tribunal went on to disallow the company tax relief for Ms Ackroyd’s subscription to Sky TV. The tribunal pointed out: ‘The BBC did not require Ms Ackroyd to have a subscription to Sky TV.’ It is true that it did not do so under her actual contract, but that was displaced by her hypothetical contract, and no one knows what her hypothetical contract would have said about Sky. It is a good bet that it would have provided for a lower salary than the BBC was prepared to pay CAM Ltd because the corporation would have had to pay National Insurance contributions and pension contributions too. So it is probable that she would have wanted something in return. A subscription to Sky would have been an obvious thing to have asked for and it is by no means obvious that it would not have been granted.
This raises the interesting question of where the hypothetical contract ends. The tribunal seems to have decided it ends after ascertaining the income. It decided that, because the subscription was paid by CAM, it needed to be looked at as a term of Ms Ackroyd’s employment with CAM Ltd. The problem with this is that there would have been no such employment under the hypothesis because, without the BBC income, CAM Ltd would probably have been insolvent.
It is hard to imagine that parliament could have intended that Ms Ackroyd should be treated as working simultaneously under two contracts for the same work, one with the BBC and the other with CAM Ltd and that the BBC contract should determine the taxability of the income, but the CAM Ltd contract should determine the deductibility of the expenses. I doubt that even Lewis Carroll would have invented such a weird world.
Robert Maas is part of the CBW tax team as well as one of the most recognised and highly commended tax experts in London. Together, Robert and the CBW tax team have a wealth of experience and industry insight, so they’re able to understand your situation and provide the best advice and support possible. Click here to contact a member of the tax team.