The Court of Appeal has handed down its long-awaited judgment in ITV Services Ltd v HMRC [2013] EWCA Civ 867. In a perceptive analysis, the court dismissed ITV Services’ appeal, upholding the tribunal decisions.
Why is the case important?
The case concerned the Social Security (Categorisation of Earners) Regulations, SI 1978/1689 (‘the regulations’) as they apply to entertainers, and in particular the interpretation of the ‘escape clause’ at Sch 1 Part 1 col B para 5A of the regulations. Since 6 April 2003, that provision has required entertainers and producers wishing to avoid categorisation to demonstrate that remuneration ‘does not include any payment by way of salary’. Salary is then defined to include inter alia at para 5A(d) ‘payments ... made for services rendered ... [and] ... computed by reference to the amount of time for which work has been performed’.
The problem in practice
HMRC has devoted considerable compliance effort to establishing liability under the regulations in all cases where work is performed over time, even where, to the objective eye, all there seems to be is a fee and a timetable and no hint of a computation. The FTT, broadly, followed HMRC’s approach and found that all the contracts reviewed fell within the regulations except for one, the ‘all rights’ contract. The UT upheld the FTT’s decision on appeal, but seemed to extend it to include the ‘all rights’ contract as well. Thus there seemed to be no means of escape from the regulations, even though they were clearly drafted to exclude certain entertainers. It is that unsatisfactory and counterintuitive anomaly that the Court of Appeal addressed.
Inadequate drafting?
The court criticised the language of para 5A. Lord Justice Rimer, giving the leading judgment, having observed that ‘the statutory language is not straightforward’, admitted that he could not offer ‘a comprehensively satisfactory explanation of the precise sense of the language’. Sir Stanley Burnton was more forthright, opining that ‘the formulations were drafted without sufficient thought being given to the peculiarities of the work of an actor’, referring to ‘difficulties of construction’, a ‘lack of care’ in drafting, and to ‘defects in the drafting’. Sir James Munby summarised the court’s view by referring to ‘this most unhappily drafted legislation’. Practitioners working in this field will feel much sympathy with their lordships’ views.
So what should be done?
Rimer LJ’s insight was to cut the linguistic Gordian knot by reading the problematic statutory language ‘in a practical way’. He held that the phrases ‘services rendered’ and ‘work performed’ in para 5A were not intended to be synonymous and held that the language was forward-looking and so embraced payments that were contingent and might never be made. Drawing attention to the requirement for there to be a computation of some kind, he said of para 5A(d): ‘I regard the sense of the language as being to the effect that it has in contemplation contracts which include provisions for either a daily, weekly or other periodical rate for work to be done on an identified day or days.’
Using those analytical tools, he restored the FTT analysis of the ‘all rights’ agreement and found that the FTT and the UT were wrong in finding that the principal all-inclusive fee provisions in the contracts were payments by way of salary.
That good news was unfortunately negated by two matters. First, most of the contracts included a ‘second call’ clause that provided for a time-based payment, so that even if no second call payment was made, para 5A applied to all the contractual consideration. Second, all the contracts incorporated separate collective agreements negotiated by the actor’s union Equity with the TV and film industries. Some clauses in the collective agreements entitle actors to certain categories of payment that would certainly be treated by para 5A as payments of salary, since they are unarguably computed by reference to time. The potential problem in relation to para 5A was recognised and an attempt was made to deal with it in practice by including ‘special stipulations’ in the contracts that disapplied the terms of the Equity agreements where the contractual terms conflicted with them.
Remarkably, the interaction of the collective agreements and the special stipulations with the contracts was not argued or considered by either FTT or UT. Rimer LJ did consider them, and held that in almost every case the collective agreements brought the contracts within para 5A. So in the end the decision remained the same, but for subtly different reasons.
What lessons can we learn?
This case is a clear example of the dangers of a formulaic approach to contractual drafting. The straitjacket of industry-standard contracts and the collective agreements has served neither producers nor performers well and has effectively imposed an avoidable 13.8% cost burden on both sides (producers often reduce fees offered to actors to compensate for their own NIC cost).
Of course, if the result of the current public consultation on the regulations is that they are repealed as regards entertainers, then the importance of this decision reduces, although it will have retrospective impact.
However, if the regulations survive the consultation unamended (although one would hope that the robust judicial criticism of the drafting would prompt at least some change), then producers and entertainers may have to make a choice between signing standard contracts that incorporate the collective agreements and suffering a deduction for class 1 NIC, or signing bespoke contracts that do not engross the Equity collective agreements and enjoying the tax and commercial consequences that should be accorded to real contracts for services.
