This month’s Chartered Accountants Tax Case Digest takes a look at the First Tier Tribunal (“FTT”) case where TV personality Lorraine Kelly’s company won its appeal against a significant tax and national insurance assessment by successfully arguing that IR35 did not apply as Ms Kelly was not an employee of ITV. To date it is not clear if HMRC plans to appeal the FTT’s decision.

The decision in this case comes at a time when the UK is reviewing employment status in the context of modern working practices but also when there are plans to extend the IR35 off-payroll working rules public sector rules to the private sector from April 2020.

Background

Alabtel Limited (“the Appellant”) was incorporated in 1992. The Appellant is the personal service company of both Mr Stephen Smith and Mrs Lorraine Smith (professionally known as Lorraine Kelly) however the FTT appeal was only concerned with Lorraine Kelly.

During the tax years 2012/13 to 2015/16 inclusive, the Appellant contracted to provide Lorraine Kelly’s services as a presenter to ITV Breakfast Ltd on the programmes “Daybreak” and “Lorraine” under a contract for services.

Following on from a meeting at ITV Studios in 2015 between employees of HMRC and representatives from ITV, HMRC issued to the Appellant a regulation 80 determination and notice of decision of Class 1 national insurance which totalled over £1.1 million.

HMRC argued that there was contract of service between Lorraine Kelly and ITV Breakfast Ltd in connection with her work for the programmes ‘Daybreak’ and ‘Lorraine’ meaning that the Appellant was required to account for income tax and NICs under the IR35 legislation as she was effectively an employee of ITV.

HMRC also contended that agency fees paid to Ms Kelly’s agent and paid by Albatel Limited were not deductible expenses as she was not a ‘theatrical artist’ but a current affairs journalist.

Albatel Limited, appealed against both the regulation 80 determination and notice of decision of Class 1 national insurance. The grounds of appeal relied upon were as follows:

• the nature and range of Ms Kelly’s work mean that she should be treated as a self-employed star. Consequently, the IR35 legislation cannot be invoked so as to deem there to be any employment relationship.
• a deduction would have been permissible for agent’s fees paid if the IR35 legislation is deemed to apply.

Decision

The purpose of the IR35 legislation was set out in Professional Contractors Group & Others v IRC [2001] EWCA Civ 1945 “…the aim of both the tax and the NIC provisions (an aim which they may be expected to achieve) is to ensure that individuals who ought to pay tax and NIC as employees cannot, by the assumption of a corporate structure, reduce and defer the liabilities imposed on employees by the United Kingdom’s system of personal taxation.”

The effect of the legislation, where it applies, is to treat the fees paid to a service company not as company revenue upon which corporation tax is payable but rather as deemed salary to the worker which is subject to income tax and NIC. The legislation applies to those workers who would be treated for NIC and income tax purposes as being employed under a contract of service but the client were it not for the involvement of the personal service company or agency.

The issues for the FFT to decide were as follows:-

1. Whether the Appellant is to be treated as an intermediary employer and whether the hypothetical notional contract between Ms Kelly and ITV would have been a contract of service, as HMRC contends, or a contract for services as the Appellant contends; and
2. Whether agency fees paid by the Appellant for negotiating the agreement between the Appellant and ITV are deductible as an expense of the employment. Issue (ii) only arises if the Appellant is found to be liable to taxation as an intermediary employer under IR35.

The FTT therefore had to decide whether the contract was a contract of services or a contract for services, considering issues such as mutuality of obligation and control. The agreement between ITV Breakfast Limited and the Appellant was discussed in detail and witness evidence was provided by Ms Kelly herself.

In relation to “Lorraine”, Ms Kelly is involved in every aspect of the show from guests to forward planning to staging. Ms Kelly explained that she may make changes to the script or running order and approve any late additions. The debrief after the show is chaired by Ms Kelly and the producer and is followed by a meeting about the next morning’s show.

Ms Kelly will discuss and decide on guests, content and running order and there have been many occasions where she has dressed up and re-enacted movie scenes in skits and sketches, the aim of which is to set up the guests in an entertaining way and keep people watching. Ms Kelly explained that she decides her own hours; she can leave after the show has aired but instead she chooses to attend meetings to make decisions about the next show.

Ms Kelly explained that she will often go to movie screenings, previews of plays or read books in order to prepare for guests on the show; this is entirely Ms Kelly’s choice and where other presenters often rely on members of their team to prepare a brief and questions, Ms Kelly carries out her own research and prepares the interview. She supplies her own phone and iPad and ITV contacts her via a personal email address or mobile phone number.

Ms Kelly gave a number of examples of turning down an interview and also told the FTT about an expedition to Antarctica she made in 2017 which was not for ITV but for a magazine and newspaper article and for which Ms Kelly was absent from the show for 4 weeks in addition to the 10 weeks holiday specified in the contract. When Ms Kelly is absent she has suggested presenters to stand in who have worked very well.

In respect of “Daybreak” Ms Kelly explained that it was a magazine show with ‘soft news’ content and human interest stories. Ms Kelly’s role and involvement was the same as for “Lorraine”.

Ms Kelly explained that she has a freelance stylist but she decides what to wear on the show. At the end of every season Ms Kelly decides which clothes to keep and which to give to charity. Ms Kelly agreed that transport was provided for her but explained that this is standard practice in the industry and furthermore there was no public transport running at the time she left for work. Ms Kelly has a personal twitter account and has no involvement in the ITV account “Lorraine on ITV”. Ms Kelly does not contribute to the ITV website which is run by ITV and disagreed that ITV could require her to contribute.

In looking at the overall picture, the FTT reached the view that the relationship was a contract for services and not that of employer and employee. The nature and range of Ms Kelly’s work meant she should be treated as self-employed and was not thus under a contract for service on the basis that she is a freelancer who decides her own hours, what items should be included in her shows and when she works. She does not receive sick pay or a pension, and there is no guarantee that her contracts will be renewed.

ITV is under no obligation to pay her if she is unable to present the show. Ms Kelly is not provided with any office space by ITV and she carries out her preparation work at home. In the hour that Ms Kelly is contracted to work she has total control over the show’s content and any additional work related to the show is her choice.

The FTT disagreed with HMRC and accepted that Ms Kelly was not appearing as herself but was presenting a persona of herself as a brand, and it was the brand that ITV sought when engaging her.

The full judgment in this case is available from:- http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11009/TC07045.pdf