Applying the intermediaries regulations to the hypothetical contract
Our pick of this week's cases
In Big Bad Wolff Ltd v HMRC [2019] UKUT 121 (9 April 2019), the Upper Tribunal (UT) found that the Social Security Contributions (Intermediaries) Regulations, SI 2000/727, apply to situations where the hypothetical contract between the worker and the end client would be one of ‘deemed employment’ as opposed to ‘actual employment’.
Big Bad Wolf (BBW) was a personal service company through which Mr Glenister, an actor, provided his services to clients. HMRC considered that under the Intermediaries Regulations, arrangements entered between BBW, Mr Glenister and end-clients made BBW liable to primary and secondary class 1 NICs. Whether HMRC was correct depended on the application of reg 6(1)(c): the question was how a hypothetical contract between Mr Glenister and end clients would be treated without BBW acting as an intermediary.
The UT had found that the categorisation regulations (SI 1978/1689) had caused the requirements of reg 6(1)(c) to be satisfied as Mr Glenister would have been treated as employed by end-clients under these regulations. BBW argued however that the right question was whether, if Mr Glenister had entered into a contract directly with end-clients, he would have been an actual employee, not whether he would have been treated as an employee.
BBW relied heavily on explanatory notes to support its argument but the UT noted that the explanatory notes summarised ‘at a high level of generality’ how the whole system applied, they did not shed any light on the way the Intermediaries Regulations should apply to the small subset of taxpayers that were entertainers. The UT added that the clear indication from the provisions was that Parliament did not intend them to be limited to ‘actual’ employment situations. The concept of ‘employed earner’ used by Parliament in SSCBA 1992 s 4A (which permits the regulations) embraced both ‘actual’ employees and those who were treated as such by virtue of SSCBA s 2(3).
The UT also rejected BBW’s argument that IR35 forms a unitary code. It noted that the income tax and NIC provisions were not identical before IR 35; there was therefore no compelling reason to assume that IR35 would operate identically across both. In particular, entertainers receiving a ‘salary’ as defined in the categorisation regulations could conceptually remain independent contractors for income tax purposes even though they would be deemed to be employed earners for NICs purposes. The UT concluded that if Parliament had intended that reg 6(1)(c) should only apply to hypothetical direct contracts of actual employment, it would have said so expressly.
Why it matters: Having found that the ordinary meaning of the intermediary regulations was that they applied in situation of deemed employment, the UT added that this analysis fitted with the purpose of the legislation. The aim of the provisions was to ensure that NICs are payable in the same way whether or not the services are provided through an intermediary. There was no reason to grant entertainers, lecturers and teachers (who all fell within the scope of the categorisation regulations) with ‘special privileges’.
Applying the intermediaries regulations to the hypothetical contract
Our pick of this week's cases
In Big Bad Wolff Ltd v HMRC [2019] UKUT 121 (9 April 2019), the Upper Tribunal (UT) found that the Social Security Contributions (Intermediaries) Regulations, SI 2000/727, apply to situations where the hypothetical contract between the worker and the end client would be one of ‘deemed employment’ as opposed to ‘actual employment’.
Big Bad Wolf (BBW) was a personal service company through which Mr Glenister, an actor, provided his services to clients. HMRC considered that under the Intermediaries Regulations, arrangements entered between BBW, Mr Glenister and end-clients made BBW liable to primary and secondary class 1 NICs. Whether HMRC was correct depended on the application of reg 6(1)(c): the question was how a hypothetical contract between Mr Glenister and end clients would be treated without BBW acting as an intermediary.
The UT had found that the categorisation regulations (SI 1978/1689) had caused the requirements of reg 6(1)(c) to be satisfied as Mr Glenister would have been treated as employed by end-clients under these regulations. BBW argued however that the right question was whether, if Mr Glenister had entered into a contract directly with end-clients, he would have been an actual employee, not whether he would have been treated as an employee.
BBW relied heavily on explanatory notes to support its argument but the UT noted that the explanatory notes summarised ‘at a high level of generality’ how the whole system applied, they did not shed any light on the way the Intermediaries Regulations should apply to the small subset of taxpayers that were entertainers. The UT added that the clear indication from the provisions was that Parliament did not intend them to be limited to ‘actual’ employment situations. The concept of ‘employed earner’ used by Parliament in SSCBA 1992 s 4A (which permits the regulations) embraced both ‘actual’ employees and those who were treated as such by virtue of SSCBA s 2(3).
The UT also rejected BBW’s argument that IR35 forms a unitary code. It noted that the income tax and NIC provisions were not identical before IR 35; there was therefore no compelling reason to assume that IR35 would operate identically across both. In particular, entertainers receiving a ‘salary’ as defined in the categorisation regulations could conceptually remain independent contractors for income tax purposes even though they would be deemed to be employed earners for NICs purposes. The UT concluded that if Parliament had intended that reg 6(1)(c) should only apply to hypothetical direct contracts of actual employment, it would have said so expressly.
Why it matters: Having found that the ordinary meaning of the intermediary regulations was that they applied in situation of deemed employment, the UT added that this analysis fitted with the purpose of the legislation. The aim of the provisions was to ensure that NICs are payable in the same way whether or not the services are provided through an intermediary. There was no reason to grant entertainers, lecturers and teachers (who all fell within the scope of the categorisation regulations) with ‘special privileges’.
