This case examined whether actors engaged under certain types of ‘All Rights Contracts’ were to be treated as ‘employed earners’ for National Insurance purposes meaning the broadcaster was liable to secondary Class 1 National Insurance Contributions on the payments made.

Background

The First-tier Tribunal dismissed appeals by ITV Services Limited (‘ITV’) against three determinations in 2009 made by the Commissioners for HMRC. The determinations were made on the basis that actors engaged by ITV under certain types of contract were to be treated as ‘employed earners’ for National Insurance purposes and that; in consequence, ITV was liable to secondary Class 1 National Insurance Contributions (‘NICs’) in respect of the payments it made to the actors. The determinations related to 3 different time periods between December 2006 and 5 April 2009.

ITV appealed against the FTT's decision to the Upper Tribunal who again dismissed the appeal. ITV then appealed to the Court of Appeal.

By way of background, the NIC treatment of entertainers is different from that which applies for tax. Following prior decisions, it was accepted that most performers/artistes in the entertainment sector were engaged under contracts for services and would generally be assessable to tax under Schedule D. However, it was acknowledged that to follow this line for NIC purposes would mean that the majority of entertainers who had previously paid Class 1 NICs would only be liable for Class 2 and Class 4 NICs which would not provide them with universal title to contributory benefits.

Thus regulations were introduced in 1998 which were intended would as a result treat the majority of entertainers as employed earners for NIC purposes. These regulations created a liability for Class 1 NICs for entertainers whose earnings consisted “wholly or mainly of salary”. Those who negotiated a fee or received rights and additional use payments higher than the salary element were not liable to pay Class 1 NICs but were regarded as self-employed as such payments did not come within the accepted description of “salary”.

Prior to 1998, the main category of performer in the entertainment industry not paying Class 1 contributions were certain “key talent” stars who were generally regarded as having been engaged on productions because of their celebrity status.

However, in all but a few exceptional cases it became the usual practice for the majority of entertainers to receive as part of their remuneration package pre-purchase payments as compensation for the loss of future repeat fees and rights and royalties worth many times the salary element. Very few actors were, therefore, paid “wholly or mainly” by salary and the original regulations did not achieve the object of bringing most entertainers into Class 1.

New regulations were introduced from 6 April 2003 to reflect the fact that instead of a “wholly or mainly” salary test, those entertainers whose remuneration includes any element of salary would be treated as employed earners. Once subject to the regulations there is a liability for Class 1 NICs on all earnings from the engagement (including rights payments).

Where the payment is a fee for the production, not a salary, and this would have to be made clear in the contract, the entertainer would remain self-employed and would be liable to Class 2 and Class 4 NICs.

In this case therefore, the question whether the actors were to be treated as ‘employed earners’ depended on the provisions of paragraph 5A in column (B) of Schedule 1 to the Social Security (Categorisation of Earners) Regulations 1978 (SI 1978/1689) (‘the Categorisation Regulations’).

In particular, the question was whether the payments made to the actors by ITV included ‘any payment by way of salary’ within the meaning of ‘salary’ in paragraph 5A. Both the First Tier and Upper Tribunals had answered that question in the affirmative.

With effect from 6 April 2003, paragraph 5A of column (B) in the Categorisation Regulations read as follows:-

“5A. Any person in employment described in paragraph 5A in column (A) whose remuneration in respect of that employment does not include any payment by way of salary. For the purposes of this paragraph “salary” means payments –

• made for services rendered;
• paid under a contract for services;
• where there is more than one payment, payable at a specific period or interval; and
• computed by reference to the amount of time for which work has been performed.”

The legislative definition of salary therefore required that the remuneration satisfies all of the above four conditions. Specifically under the third bullet point, this includes was intended to include those entertainers engaged on a single day or two day engagement. This meant that the policy intention of ensuring that the regulations would apply to film extras and walk-on parts was achieved. The last bullet point was intended to ensure that “key talent artistes” would not be included as they would be contracted to appear in productions for which their remuneration is not directly calculated according to the period of weeks/months assigned to the production.

ITV's appeal required a consideration of the interpretation of paragraph 5A and of its application to the several types of contract under which the actors were engaged, being variants of industry standard contracts.

In particular, ITV argued that:

(a) whether or not an actor is within the column (B), paragraph 5A, exception is not a question that has to be answered at the outset of his engagement, i.e. when his contract is signed; (b) whether or not any part of his remuneration is ‘salary’ within the meaning of paragraph 5A is determined only when it is paid; and (c) whether or not it is ‘salary’ also depends on how it was originally negotiated.

Decision

The Court of Appeal unanimously dismissed ITV's appeal and upheld the principal position maintained by HMRC that whether or not the provisions of the Categorisation Regulations apply is to be determined at the outset of an actor's engagement by reference to the terms of their specific contract.

In particular, the Court decided that where contracts between the engager and the entertainer incorporated the payment provisions of collective agreements (that is, national standard agreements negotiated between producers’ representatives and Equity) the effect of such provisions would be to include payments ‘by way of salary’ as defined.

Save for what was described as an ‘All Rights Contract’ (which HMRC had previously agreed was not within the Regulations), the Court found that the remuneration agreed to be paid under all other contracts presented to it included payments provided for in the collective agreements (for example production day and attendance day payments) and, therefore, included a payment by way of salary.

Furthermore, in all other contracts where the terms entitled the entertainer to receive payment on a contingent basis (for example on account of overage/overtime), that payment was a ‘payment by way of salary’.

More specifically, the Court held that attendance day payments made to actors under ITV contracts were salary payments for NIC purposes, rather than earnings from self-employment, because they are set according to rates agreed under national collective agreements between producers and the actors’ union Equity under the ‘All Inclusive Fees Equity Agreements’, the ‘Weekly Equity Agreement’ and the ‘Option Equity Agreement’.

As a result, hourly or daily payments such as overtime or overage payments to which an entertainer is entitled under the contract, even though contingent and whether or not actually paid in practice, are computed by reference to the amount of time for which work is performed.

The full text of the case is available at http://www.bailii.org/ew/cases/EWCA/Civ/2013/867.html