On 07 June 2024, we learned that another decade-long IR35 case remains unresolved after the Upper-Tribunal remitted the case involving broadcaster and writer Adrian Chiles back to the First-Tier tax tribunal (FTT) for a fourth hearing. The case involves his media-based company, Basic Broadcasting Limited ("BBL") and relates to services provided to the BBC and ITV over 12 years ago, spanning tax years 2012 to 2017.
Judge Cannan had initially upheld the BBL appeal on 09 February 2022, after twoFTT hearings, but HMRC successfully appealed to the Upper-Tier Tribunal (UT), which was heard two years later on 05 February 2024. Justice Meade ruledthat legal errors were made in the initial decision and that the case should be remitted back to the FTT for reconsideration.
In my view, this IR35 case, and others, highlights fundamental issues with HMRC's Litigation and Settlement Strategy (LSS) and the fairness of the tax tribunal system, which has opened the door to state-sponsored lawfare. BBL now suffers collateral damage, and HMRC may be in a catch-22 situation.
The legal errors
To classify a contract as one "of service" or "for services", one must apply a test based on the 1968 case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance ("RMC"). The test consists of first identifying pre-conditions of mutuality of obligation and a sufficient framework of control, followed by considering the extent or sufficiency of those, along with all other factors. Those other factors can include factors outside the contract. One must consider all of the circumstances in a "standing back" approach, then decide based on an impression of the overall whole ("The Third RMC Stage").
HMRC's appeal to the UT contained the same primary ground as the appeal in the Court of Appeal decision in CRC v Atholl House Productions Ltd [2022] STC 837. HMRC believed that the FTT wrongly adopted the test of whether Mr Chiles was in business on his own account instead of the correct analysis required at The Third RMC Stage of the test, failing to put the relevant terms of the contracts at the heart of its analysis.
The UT upheld HMRC's appeal and concluded that the FTT had fallen into the same sort of error as the UT in HMRC v Atholl House Productions [2021] UKUT 0037 (TCC).
In his decision, Justice Meade recognised "the uncertainty and financial exposures generated by the difficulty in establishing a clear and stable legal position" and said they "continue to produce a very real human cost." Then, "With reluctance", the UT chose not to remake the decision but instead remitted it for reconsideration by the FTT.
Justice Meade's observation is certainly justified. HMRC has appealed all but one of the last seven IR35 cases won by taxpayers, with half being remitted to the FTT. Such outcomes demonstrate the emerging impediment to accessing justice, exposing an unlevel playing field between taxpayers and tax authorities – something which changes in 2009 was supposed to resolve.
Tribunal reform hasn't worked
The FTT came into existence on 01 April 2009 as part of a significant reform under the Tribunals, Courts and Enforcement Act 2007, designed to streamline and simplify the previously complex tribunal system. The reform aimed to create a more coherent and accessible system for resolving tax-related issues.
The FTT was supposed to be less financially risky for taxpayers challenging tax decisions, and the "no costs" regime at FTT was meant to encourage access to justice, enabling taxpayers to bring legitimate disputes without fear of potentially large legal costs if they lost. Individual taxpayers or small businesses have fewer resources than tax authorities, so the approach should have reduced the inequality of arms, ensuring taxpayers didn't simply give up on potentially valid claims due to cost concerns.
It's not worked. A gaping hole has emerged.
Whilst the FTT is a "no-costs" regime, the loser at the UT must pay the winner's costs, even when cases are undecided and remitted back to the FTT. Then, the taxpayer faces additional unrecoverable costs at a third hearing. However, we cannot blame the judges for this - it is a consequence of the rule which does allow cases to be remitted back to the FTT. Perhaps the costs rule needs to be reconsidered in this common scenario.
Is "lawfare" back?
The FTT freely permits either side to appeal decisions to the UT. HMRC's lawyers frequently argue in applications for Permission to Appeal (PTA) that "The threshold for granting permission to appeal is a low one; it need only be established that the complaint about the decision is arguable. The FTT does not have to agree that there has been an error of law.
While the threshold for granting permission is the same for both parties to the appeal the reality is that HMRC are much more likely to seek permission. This is partly over a natural reluctance for individual taxpayers to prolong matters but also for the very real fear of incurring costs – something which is if little or no relevance to HMRC.
It could well be argued that the real fear of costs undermines the spirit of the 2009 reforms and reintroduces the impediment to natural justice, which the reforms were designed to remove.
In the fourth and final hearing at the FTT in the Atholl House saga, the case involving broadcaster Kaye Adams, HMRC reached deep into the public purse and fielded three barristers in their desperate attempt to win the case at the fourth hearing. After Atholl won the case (for the third time), Adams said: "Over the nine years of this investigation, the mental stress has been close to unbearable at times, and the legal costs I have incurred far outweigh the tax at stake."
In the case of RALC Consulting, which involved an IT contractor, the appeal was upheld in favour of the appellant at the FTT. HMRC appealed, and the case was remitted back to the FTT. However, for cost reasons, the decision forced RALC Consulting into bankruptcy. Mr Alcock's dream of building a consultancy was shattered.
The Collins dictionary defines "Lawfare" as "the strategic use of legal proceedings to intimidate or hinder an opponent." In light of the six out of seven appeals by HMRC, with half of those cases remitted, one questions whether the tax tribunal system is meeting its aims of being an accessible system when what we are seeing is taxpayers facing a tax authority with apparently unlimited funds, whose behaviour appears to be intent on pursuing taxpayers at all cost.
Has HMRCs senior management team taken their eyes off the ball? I am really concerned that there appears to be a lack of oversight at the top of the organisation.
Is parliamentary scrutiny working?
On 14 December 2023, Jim Harra, First Permanent Secretary and Chief Executive of HMRC, faced scrutiny by the Public Accounts Committee (PAC) on IR35 matters. Some of the answers he gave caused me significant concern.
Harra claimed that most IR35 litigation did not go past the FTT. This is untrue. HMRC has appealed every single case they have lost since April 2019. Harra also claimed that HMRC had won 70% of employment status disputes, which in the context of the report can only be a reference to IR35 cases. This is also untrue. Since the courts were reformed in 2009, the empirical data is 59% taxpayers and 41% HMRC.
The PAC also expressed concerns about HMRC always using barristers at FTTs, a supposedly accessible system for taxpayers. Harra claimed that "HMRC officers represented "most" cases. While this might be case for appeals to the FTT in generally it certainly does not apply in IR35 cases. Of the last 28 IR35 hearings, HMRC has used barristers in all but three.
My concern about some of the information that Mr Harra has provided to Parliament about IR35 isn't new. In a previous PAC hearing on 21 February 2022, when asked by the PAC Chair, "What is the appetite for HMRC to appeal to cases on this issue?" Harra responded: "We do not appeal if it is on the facts, basically. If a tribunal has determined that the facts are not quite as HMRC understood them, then that is generally the end of the matter."
Tax readers familiar with tribunals will know that an appeal on the facts is a challenge based on the case law in Edwards (Inspector of Taxes) v Bairstow [1956] AC 14. But, in the BBL decision published on 06 June 2024, the judge states [paragraph 86] that HMRC made such a challenge. HMRC counsel also sought to make an Edwards v Bairstow challenge at the UT for their appeal against the decision in S&L Barnes Ltd v HMRC [2023] UKFTT 42 (TC), heard on 24 April 2024 (decision pending). The expression ‘generally the end of the matter’ may apply elsewhere, but doesn’t appear to apply in IR35 cases.
I am certainly not saying that the man who runs HMRC deliberately misled Parliament, but it does beg the question, "Where is he getting his facts from?" Was he given the litigation data by the HMRC litigators, who appear to be behaving in a manner that is contrary to what he told Parliament? To try and find out, I submitted an FOI request and obtained a copy of the IR35 briefing papers Harra relied upon when he gave evidence on 14 December 2022. Mysteriously, none of the points which I have referred to above in Harra’s evidence came from his briefing papers. What was the source of the information?
Those who have been following the Post Office Scandal may identify parallels. In the Post Office scandal, Parliament only appears to have been given a partial account of what was really happening and there was a disconnect between what was being said by those at the top of the Post Office and what employees were actually doing.
It is certainly "arguable" that some of HMRC's litigators are failing to follow the spirit of the law in the Tribunals, Courts and Enforcement Act 2007, and are adopting a lawfare strategy to win cases at all costs. Whatever the reason I am deeply concerned that neither Parliament nor HMRC have a proper grip on the governance of IR35 disputes. In years to come, will we hear Harra and Dame Jayne-Anne Gadhia (Chair of the HMRC Board) give evidence to an enquiry where they claim they were blissfully unaware of what's been happening because their troops told them everything was okay?
What next for BBL?
In my view, the BBL case is destined to follow in the footsteps of Atholl House and be upheld again at the next FTT hearing. BBL's defence team have been outstanding, and a plethora of facts was presented at the original FTT to demonstrate BBL entered the contracts with the BBC and ITV on a business-to-business basis, with no intention of either party wishing to form an employment-type relationship. Chiles pitched ideas and contributed to other programmes, working with multiple production companies. From 1996 to 2019, he contracted with nearly 100 different third parties. Hardly the "essential characteristics of employment."
Whilst HMRC had their appeal upheld at UT, for which BBL will be liable to pay their costs, in my view, HMRC is now facing an inevitable defeat, which provides a dilemma for them because they must adhere to and navigate via their own Litigation and Settlement Strategy (LSS).
The LSS states, "HMRC seeks to secure the best practicable return for the Exchequer." However, it also states that "where HMRC believes that it is unlikely to succeed in litigation, it will, in the majority of cases, concede the issue." The LSS also states, "in circumstances where a precedent may be set, or where HMRC is seeking to influence customer behaviour – potential tax liabilities of the same or other customers."
No further legal precedents are to be set in this case because those have already been argued. Customer behaviour does not need to be influenced –it has already been due to the off-payroll reforms.
Given the final Atholl House outcome and the close alignment of the cases, it seems doubtful someone can produce a credible legal argument claiming HMRC are likely to succeed at a further FTT hearing. The alternative to HMRC potentially entering into a futile set of legal proceedings would be for them to claim their costs for the UT and then withdraw from the case – not an attractive route either.
HMRC appear to be facing a catch-22 decision.
Taxpayer Bill of Rights
HMRC's relentless approach to these IR35 cases has highlighted the flaws in the IR35 legislation and HMRC's enforcement strategies, in addition to flaws with the tax tribunal system. We need reform.
In the May 2022 issue of Taxation, I argued that rather than relying on presenters of TV shows to fund litigation to help HMRC change the law, simple reform could address the imbalance by making HMRC fund the taxpayers' costs where individuals and small businesses are involved. There are many other simple fixes, much of which are a codification of elements of the LSS, that would help restore fairness for taxpayers.
Ultimately, we need a US-style statutory Taxpayer Bill of Rights and an independent Taxpayer Advocate. Firm rules, independently overseen, will help guarantee fairness from HMRC and help shift the balance back towards basic decency and fair play, ultimately resulting in a better system for HMRC and taxpayers.
As for BBL, that case should be terminated.
Dave Chaplin is chief executive officer of tax compliance firm IR35 Shield that assists firms with IR35 assessments and HMRC IR35 compliance checks. He is author of IR35 & Off-Payroll Explained. This item first appeared in Taxation Magazine in July 2024.