The personal company of BBC Look North presenter Christa Ackroyd was landed with a tax bill of over £400,000 recently when HMRC successfully took it to the Tax Tribunal – what does this mean for contractors and those who hire them?

Many of you will be familiar with the term IR35 – the name, based on the original press release, for the tax legislation which aims to prevent people who would otherwise be regarded as an employee from avoiding tax and NIC on their “salaries” by having them paid to a limited company instead.

In such situations the “employer” is generally cooperative because they also save employers’ NIC at 13.8%. Furthermore, they hope to avoid other inconveniences such as employment rights, paid holiday and sickness, and pension contributions. Where both parties wish the relationship to be freelance, the “employer” will even insist on the use of a personal company to pass any employment status tax problems to the freelancer.

Historically the largest concentrations of contractors have been in the IT, technical and media sectors. However, with the growth of the “gig economy” the number of such arrangements is spreading to businesses of many other types, and the potential loss of tax revenues is growing.

Policing the system effectively has proved an impossible task for HMRC as individual contractors – and it is each of their personal companies where the lability for PAYE arises under the rules – are so numerous.

Instead, they have set out to gather better information by requiring intermediaries who provide workers via personal service companies to make quarterly returns giving details of contractors they have made payments to. In addition, public sector bodies are now required to examine the status of “off-payroll workers” and where they fail the employment status test, deduct PAYE themselves from the payments they make.

Alongside this, HMRC are choosing some high-profile media figures – apparently there are more in the pipeline – for investigation, demanding any tax they consider due and taking appeals to the Tax Tribunals if necessary.

In many ways Ms Ackroyd can consider herself pretty hard done by. Freelancing is commonplace in the media, at least one eminent expert argues strongly that it was a wrong decision, and the BBC, having cooperated in setting up the arrangement – they even drafted the contract – seem to have dropped her unceremoniously and then tried to distance themselves from the case. However, to most people the arrangement, under which she had a seven-year contract, for a more or less fixed annual amount, for what was very much like a full-time job, will probably look like employment. The tribunal certainly thought so and paid little attention to the numerous other status indicators.

Assuming Ms Ackroyd chooses not to appeal the decision, perhaps she will use her new-found status to sue the BBC for unfair dismissal. And this leads to a very serious point. Many contractors and businesses argue forcibly that freelance working arrangements without employment status work for both parties, and the loss of this flexibility will cause damage to the economy far greater than the extra tax collected. Others argue that those who disregard employment rights and taxes are competing unfairly.

Either way, our message to all involved is to constantly review your contractual arrangements – and it’s necessary to look at the “real life” arrangement and not just what the written contract says – to make sure you are IR35 compliant. Do get in touch with one of our tax partners to discuss:

Richard Bunker

Pete Edwards