Can you do an Adrian Chiles and win on IR35 using 'in-business'?

It’s not just freelancers fresh from a failed (but documented) pitch who can take some positives from Adrian Chiles’ Basic Broadcasting Ltd triumphing over HMRC in relation to the veteran TV presenter’s IR35 status, writes former tax inspector Carolyn Walsh, managing director of Andraste Accounting, an ICAEW member company.

Exposure? What exposure

Indeed, from reading the FTT judgment in Mr Chiles’ favour, it is my contention that any freelance professional who is visibly, demonstrably ‘in-business,’ with an identifiable commercial set-up, and who would not carry out contracts individually, but would instead carry them out as a company, ought to be reassured too. Exposure to the off-payroll rules, in the outlined scenario, shouldn’t even really be a thing.

HMRC overlooks this fact. And as FTT judge Jonathan Cannan’s judgment vindicating Mr Chiles indicates, the tax authority has become overly focused on a certain set of IR35 status factors.

IR35 is far from all about a few factors

The same preoccupation is arguably true from IR35 status experts, some of whom would no doubt have written off Mr Chiles’ chances of securing an outside IR35 determination, given that the classic IR35 status factors of Control and Substitution/Personal Service went against him. And these factors went against him at BOTH the big clients his company was challenged by HMRC under – ITV (two contracts) and the BBC (three contracts), between April 2012 and April 2017.

So this tribunal outcome finding that IR35 didn’t apply to the Daybreak and Match of the Day 2 presenter, contrary to HMRC’s demand of £1.7million in tax and national insurance owing to the five contracts, serves as a reminder that there is much more to an IR35 status determination than the technical factors used in the taxman’s status enquiries. 

Control, substitution and financial risk

The judgment in BBL V HMRC may not be binding and HMRC may appeal it. But I believe we can extrapolate from the 67-page ruling that a low level of control over a freelancer by a client, along with a high level of financial risk for the freelancer, where that freelancer has the right to use a substitute in order to carry out part of the works, should be strongly seen as an indicating an outside IR35 position.(N.B these three weren’t necessarily aspects of Mr Chiles’ engagements).  

What if a client (or HMRC) disagrees with a freelancer’s understanding of his/her responsibilities under that contract for service? This disagreement is now strong possibility under the April 2021 IR35 rules in the private sector, as since then, it is clients which decide the freelancer’s IR35 status. Unsatisfied with a freelancer self-prescribing ‘outside IR35,’ the client may play it safe and deem the contract as being inside IR35, or to be one of employment. If it’s HMRC which is the unsatisfied party, obviously the department may launch a challenge. 

However, an individual who enters into contracts as a business has no such issues, at least theoretically. To put this into practical terms which FreelanceUK readers will identify with, where the contract value sought is an amount sufficient to cover their businesses’ running costs and to make a profit, as opposed to a rate of pay that he/she is willing to supply his services, then the status of the contract should not really be a question.  

But conversely, being paid via a limited company and waving an outside IR35 flag simply by virtue of charging a day rate for your services, definitely doesn’t necessarily make you a bonafide freelance business owner who needn’t consider IR35.

Achieving an outside IR35 position, as Adrian Chiles did

This unescapable fact won’t be music to the ears to some freelancers. But how should such freelancers really be going about their business, if they want to be outside IR35?

Well, it should go something like this. The freelancer’s company enters into a business-to-business contract, which determines the scope of the client’s works. The director tenders for, and negotiates for, the contract value. The freelancer does this to ensure their business has the best opportunity to make a profit and more importantly, to avoid making a loss.

The freelancer will then plan the work to their best advantage. But often overlooked, the freelancer doesn’t need to personally generate the majority of the company income, either because part of the income is generated by the materials, or equipment supplied, or because part of the work is done by the company’s subcontractors or employees. 

Sheets, badges, and acting

As to paperwork, the freelancer’s company balance sheet should show capital assets and an amount for depreciation, or a profit/loss when those assets are sold. The freelancer’s company will also have some recognised ‘badges of trade.’ And while those badges might not include a pricey PA or expensive agent like Mr Chiles utilised, for the typical freelancer they will include marketing material, a company website, an operating business plan, a client-base, membership of a business organisation. Even a business premises (not that freelancers need one nowadays).  

In summary, building and exhibiting the traits of an identifiable, stand-alone business, along with acting on behalf of one’s business -- rather than as an individual -- when entering into contracts, while all the time acting in an entrepreneurial manner, should be seen as essential to the point of making IR35 status all but irrelevant, if an inspector calls.

 

1st March 2022

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