HMRC lose another battle with a high profile taxpayer over the IR35 rule. And this time it took two tribunals and seven years to defeat allegations of tax avoidance.

What’s the story?

This particular story relates to work Mr Chiles did between 2012 and 2017 for ITV and the BBC. Since 1996 Mr Chiles has worked as a freelance contractor through his personal services company Basic Broadcasting Limited. But HMRC said that for this five year period he was actually ‘an employee for tax purposes’, not a freelancer. They considered that his working relationship with the BBC and ITV was that of an employee, not a contractor.

Therefore different tax rules apply to his income from this time, and he hadn’t paid enough. In fact, HMRC said he owed the Treasury £1.2 million income tax and £500,000 National Insurance Contributions for that five year period.

Understandably, Mr Chiles appealed against this decision. Seven years and two tribunals later he has finally received a ruling in his favour.

The tribunal said that Mr Chiles was “in business on his own account” and was not an employee of either production company. This means that the tax he did pay at the time was correct and there was no money owed to HMRC. He does have to pay his own substantial legal fees. Importantly, the tribunal also ruled that there was “no suggestion Mr Chiles set out to avoid paying tax.”

How is the tax different for an employee and freelance contractor?

If you’re an employee earning up to £50,270 per year, you pay 20% income tax and 12% National Insurance Contributions (NICs). If you earn over £50,270, you pay 40% income tax and 12% NICs.

As a freelance contractor, you pay corporation tax at 19% and 9% NICs and dividends are taxed at a starting rate of 7.5%.

HMRC knows that some people use personal service companies to avoid paying higher tax rates, when they should really be classed as an employee. And so has introduced the IR35 rule as part of its tax avoidance crackdown.

But it can be very difficult to enforce. Pinsent Mason’s Penny Simmons said that the outcome of Mr Chiles’ tribunal:

“demonstrates how complicated the rules are to apply and adds to the growing uncertainty for business as to when contractors should be taxed as employees within IR35.

“One of the difficulties with IR35 is that there is no single definition of employment status for tax purposes, rather it is necessary to look at a number of factors together…”

An HMRC spokesperson said they will, “carefully analyse the outcome of the tribunal before considering next steps.” With a £5 million case against Gary Linekar in play, this seems like a wise decision.

And these rules aren’t just applicable to high profile taxpayers, like Adrian Chiles and Lorraine Kelly. They’ve caused confusion across all industries, particularly the construction sector. One can only hope that the more these cases are discussed, the more everyone will understand their application.