Contractors working for clients in the media and entertainment sector may be facing yet another new employment status test from 2013. It’s one that could drive freelance talent away from the BBC and increase costs of programming for TV licence payers. And despite the introduction earlier this year of HMRC’s business entity tests, this additional – and possibly divergent – test is likely to be launched just 12 months later, in April 2013.
Following its review of freelancing arrangements commissioned after criticism by the House of Common’s Public Accounts Committee (PAC), the BBC plans to work with HMRC to “develop and apply a new employment test”, which it hopes will “serve as a model...for the BBC and potentially the rest of the broadcasting industry.”
Of greatest concern to contractors is that the BBC, with HMRC’s encouragement, could invent draconian new guidelines with little basis in law and which will exclude genuine contractors and freelancers from working for the BBC. It could borrow from the model of HMRC’s Film Unit guidance, which also has little basis in law, possibly even encouraging the wider adoption of the Film Unit guidance by the broader media and broadcasting sector.
Ultimately, it is the PAC’s and HMRC’s objective to increase tax yields by driving more workers into paying income tax and National Insurance Contributions (NICs) at source, and without deductions. Tax reforms to merge income tax and NICs would remove this issue and the ongoing assault on Limited company contractors.
The BBC is not at fault – it is reacting to political and media pressure
Immediately following the PAC’s report in October 2012, when PAC chairman Margaret Hodge MP described the use of limited companies by contractors delivering services to the public sector as “staggeringly inappropriate”, the BBC commissioned Deloitte to review its freelancer hiring procedures.
Genuine contractors could be forced to pay more tax than they should in order that they can continue to work for the BBC
Deloitte’s findings largely exonerated the BBC from any wrongdoing, confirming that “there was no evidence to suggest that the BBC has engaged with PSCs [personal service companies] to avoid tax or NICs.” It recommended “a new policy incorporating an unambiguous employment status framework.”
However, Deloitte went on to say:
“The employment status misclassification risk could be greatly reduced if the BBC were able to engage with HMRC to develop a framework for determining employment status of the BBC’s on air talent, which should be incorporated into any new policy. We have discussed this with senior HMRC officials and initial discussions have been constructive and encouraging.”
Furthermore, Deloitte recommends “increased liaison with and disclosure to HMRC in respect of all freelancer engagements”, which will include the BBC sending details of limited company contractors it has compliance checked to HMRC, whether or not there are any irregularities.
This early collusion with HMRC suggests that the BBC’s limited company services providers are likely to attract ongoing and in-depth attention from HMRC, regardless of whether there is any basis for tax investigations. It also underpins the BBC’s decision to develop a new ‘unambiguous’ employment status test in association with HMRC.
The well trodden ground of ‘objective’ employment tests
‘Employment’ is not defined by statute in UK law. A worker’s employment status is determined by applying complex employment case law going back several decades. The application of IR35 is also dependent on the same principles and case law.
Because employment income attracts significantly higher direct taxation in the form of income tax and NICs, it is in HMRC’s interests to classify workers as employees, rather than as self-employed or genuine contractors.
As the main driver to determine employment status, for HMRC at least, is to differentiate workers for tax purposes, all attempts to create an objective employment status test have failed. Most do not accommodate either the legal precedent enshrined in case law or the subtleties and realities of being self-employed versus being an employee.
The BBC’s proposed tests have little basis in law
Although the new ‘objective’ employment test devised in association with HMRC is unlikely to have a statutory basis, the four principles the BBC plans to adopt to underpin the test have little foundation in accepted employment status case law.
According to its report Review of Freelance Engagement Model, the BBC is planning to base its tests around four core principles:
- Length of engagement
- Certainty of work
- Manner of payments and income earned elsewhere
- Control.
Principles 1 and 3 may be contributory factors in a typical employment status review, such as during an IR35 investigation, but do not have the weight of significant case law. Item 2 refers to mutuality of Obligation, which is increasingly considered to be a lower priority status indicator.
The fourth principle, control, is a major factor when determining employment status and has a significant body of case law. It is the only principle adopted by the BBC to be underpinned by case law.
Broader application of new employment tests – broadcast and beyond
The BBC expresses a hope that its new employment status test “will serve as a model or 'modus' for the BBC and potentially the rest of the broadcasting industry.” Deloitte’s report also recommends extending the BBC’s new freelancer compliance regime to its IT contractors.
In the event that the BBC does create a new employment test in association with HMRC, based on the four principles it has identified, contractors face being subjected to yet another test without foundation in employment case law.
This could lead to genuine contractors and freelancers becoming incorrectly classified and faced with the choice of taking an employment contract or not working for the BBC. Genuine contractors could be forced to pay more tax than they should in order that they can continue to work for the BBC.
The broader implications are equally concerning, particularly if the new rules become widely adopted throughout private sector media and broadcasting in the same way as HMRC’s Film Unit guidelines.
IR35 “widely considered to be ineffective”
In theory, the BBC should not be required to implement an employment status test for its limited company contractors because legislation already exists to tackle false self-employment via an intermediary – it is IR35.
However, Deloitte’s view is that IR35 is “widely considered to be ineffective”, and draws attention to the Office of Tax Simplification’s similar conclusions. It also highlights that HMRC lacks the resources to police IR35 and even if it did, the legislation is so complex that it is difficult to make an effective case.
It is likely that IR35’s perceived complexity is what has driven Deloitte to recommend yet another ‘objective’ test of employment be created, despite the fact that neither HMRC nor any other organisation has yet been able to create one.
The BBC has only a short time before its target of 1 April 2013 in which to create its new test, so it will be the second quarter of 2013 before its full impact will be felt. It is hoped that the broadcaster will release details before then to enable contractors to prepare for its new regime.