HMRC have failed in their bid to apply IR35 to Albatel Limited, the trading company operated by national TV favourite Lorraine Kelly. Looking at the facts of the case (Albatel Limited v HMRC TC07045), this was never going to bring about what HMRC set out to achieve, yet they doggedly pursued the case nonetheless, losing not once but twice, when they took it to First-Tier Tribunal appeal. Will they take it further? Doubtful, given that they would undoubtedly lose again, and the last thing HMRC would want is another High Court decision weakening their position on IR35.
HMRC’s case centred around the presence of control and mutual obligation on both parties. These, they argued, were sufficient to indicate that there was a contract for service, and that in the absence of an intermediary company, Ms Kelly would be considered an employee of ITV.
The First Tier Tribunal analysed whether there was a contract of service, or for services:
- HMRC argued that there was mutuality of obligation but FTT agreed with Ms Kelly that it amounted only to the “irreducible minimum” and was not determinative of the issue.
- Control of her work lay with her; the level of control by ITV fell substantially below the sufficient degree required to demonstrate a contract of service.
- Looking at the overall picture the relationship between Ms Kelly and ITV was a contract for services and not that of employer and employee. ITV was not employing a “servant” it was purchasing a product, namely the brand and individual personality of Lorraine Kelly.
Ms Kelly was able to clearly demonstrate that she had substantial control over the way the services were performed, and that any control over her was simply by way of compliance with overarching broadcasting regulations. HMRC’s emphasis on Supervision, Direction and Control appeared to turn the tables on them, as they were unable to establish that any appreciative degree of control was exercised over the contractor. Importantly, Ms Kelly was able to evidence that favourable terms which were included in the written contract were also generally agreed between both parties in an unwritten (hypothetical) contract.
The Lorraine kelly case is undoubtedly going to be compared to a case involving another television presenter, Christa Ackroyd, who had a less pleasing result in September 2017, when HMRC successfully argued that Ms Ackroyd was caught by IR35 regulations (Christa Ackroyd v HMRC TC6334).
- HMRC argued that the BBC exercised control over the show that Ms Ackroyd appeared in. Ms Ackroyd maintained that she had a high degree of autonomy and influence, but the content of the show was subject to BBC’s editorial guidelines, and this was used as evidence of the client’s overall control. Therefore the degree of control exercised over the contractor was considered by the Tribunal to be indicative of a contract of service ie employment. The written contract indicated lack of control, but the generally agreed, unwritten agreement between the parties conflicted with this.
- HMRC argued that there was mutulaity of obligation, insofar as the contract in place was for a fixed 7 year term, with BBC having a “first call” on Ms Ackroyd’s service for 225 days out of each year. Using past case law, HMRC successfully argued that the work was “pursuant to a highly stable, regular and continuous performance”. The Tribunal accepted that there was an obligation for work to be provided by BBC, and an obligation for the worker to provide the service.
So what can we learn from this?
- Degree of control can be a determining factor in an IR35 status decision. Does the client exercise control over the way the services are performed? HMRC will accept that a client may determine where/when the services are performed, and what those services will be, but if they also determine how those services should be performed, there is control, and IR35 may well apply.
- Lack of mutuality of obligations has been one of the most important determining factors in IR35 since the inception of the legislation, and it continues to feature in most cases.
- The written contract may well state that the client will not exercise supervision, direction or control, or that there is no mutuality of obligation, but in the absence of a generally agreed unwritten contract which underpins this, the contract amounts to nothing more than useful wording. Much of the Lorraine Kelly case focused on what had been “generally agreed” between the parties. In any IR35 status enquiry, HMRC will always want to examine the “hypothetical” contract, that is to say what happens in practice, as generally agreed between the parties. The framework for such unwritten agreements should therefore be put in place at the outset. As the saying goes “fail to prepare, prepare to fail”.