Lorraine Kelly is the most recent in a long line of people in the entertainment industry that have hit the headlines because of HMRC action against them. But has she actually tried to avoid paying tax?
Taxpayers are entitled to challenge any tax bills they do not agree with. Lorraine Kelly appealed against a tax bill sent to her by HMRC, which requires a formal tribunal hearing.
What is HMRC’s case?
HMRC issued Lorraine Kelly with a £312,615 National Insurance bill and a £899,912 income tax bill in 2016. They argue that, if she had been a direct employee of ITV during the time in question, this is how much tax she would have paid. HMRC have challenged her status under regulations called ‘Off-payroll working through an intermediary’ (IR35). Basically, your work is at a particular location, but you are paid through an agency of some kind. The contract is between the agency and the workplace, with a separate contract between you and the agency.
If she works for ITV, why isn’t she paying tax as an employee?
This is the key to the tribunal’s decision – and where the whole thing gets a bit complicated. Because, as far as Lorraine is concerned, she is paying the correct tax for her employment status as a freelancer. Lorraine is not actually working as an employee of ITV and the tribunal judge came to this same conclusion.
She is classed as independently self employed through the personal services agency called Albatel Ltd, of which she and her husband are the joint shareholders and directors. This means that she is contracted to provide specific services and is not ITV’s employee.
Why does the distinction between freelancer and self employed matter?
If you are employed, you pay income tax and national insurance through the Pay As You Earn (PAYE) scheme. You are also entitled to employed persons’ rights, such as sick pay, holiday pay and maternity pay.
If you are in any other category, you still pay income tax and national insurance, but through a different system and at different rates. This includes: workers, freelancers, agency workers, self employed, independent contractors, zero hours contracts and those working in the gig economy.
In Lorraine Kelly’s case, HMRC attempted to apply the IR35 rules because she works for ITV through an intermediary entertainment agency. It was then up to the judge to examine the evidence to decide whether or not her actual working situation should have been defined as an employee all along. The regulations stipulate several key areas for consideration.
What is the judge’s conclusion?
As reported in the Guardian, the Judge Jennifer Dean concluded that “the relationship between Ms Kelly and ITV was a contract for services and not that of employer or employee”. This means that she does not have to pay the enormous tax bill because the evidence does not support HMRC’s assessment of Lorraine Kelly’s employment status. There were several reasons for this ruling, including:
- Lorraine Kelly did not get any employee perks from ITV, like sick pay.
- There was no direct ITV control over the content of her shows, although they were subject to OFCOM’s rules.
- She controlled her own working hours and worked for a number of different clients during the financial period in question.
Why does her role as an entertainer impact on her tax position?
This has claimed the focus of a lot of the headlines about this story. As part of the tax tribunal, both parties wanted the judge to determine whether or not Lorraine can claim her agent’s fees as a tax deductible expense. The ruling states that she is presenting a “persona of herself” during the shows, is not just being herself and therefore can be classed as a “theatrical artist”.
It says, “We should make clear we do not doubt that Ms Kelly is an entertaining lady, but the point is that for the time Ms Kelly is contracted to perform live on air she is public ‘Lorraine Kelly’; she may not like the guest she interviews, she may not like the food she eats, she may not like the film she viewed but that is where the performance lies.”
That level of perkiness first thing in the morning is always a little suspicious.
Ultimately, this means that her agent’s fees are tax deductible.
What does HMRC think about the ruling?
A spokesperson for HMRC said: “We are disappointed that the first tier tribunal has decided that the intermediary rules (also known as IR35) did not apply in this case. We will carefully consider the outcome of the tribunal before deciding whether to appeal.”
Are there any other repercussions because of this case?
Some people feel like HMRC have wasted a lot of time, effort and money on pursuing a case that they should have known would not be ruled in their favour.
Andy Chamberlain, the Deputy Director of Policy at the Association of Independent Professionals and the Self Employed (IPSE) said: “Lorraine Kelly’s case is the fourth of five IR35 cases that HMRC have lost since 2018. It is now clear that they have wrongly been hounding many BBC and ITV presenters over a tax law they do not understand themselves.”