Sunday, October 4, 2009

IR35 rules are not being applied to BBC freelancers

There is no mention of IR35 in an otherwise balanced article in today's Sunday Times under the heading: "BBC advises stars on avoiding tax". And yet, unless we expect BBC freelancers to be subject to a different regime to everyone else, the rules in IR35 are clearly very relevant. Let me explain:

When I first saw the article I thought 'Here we go again'. I expected it to be a biased piece about how the BBC encourages its freelance presenters to provide their services through personal service companies.

That message was indeed the thrust of the article although it was far more balanced and informed than the opening paragraphs had led me to expect. I suspect the input of Richard Murphy who is quoted later in the article and who may well have influenced the tone and coverage. It is still misleading in part though and this is largely a function of undue complexities in our tax system.

The use of personal service companies really took off shortly after Gordon Brown introduced a 0% (and later 10%) rate of corporation tax. Many genuine freelancers set up such companies to reduce the effective rate of tax on their incomes. The overall benefits of such arrangements have significantly reduced in recent years such that some contractors (and even BBC stars) could end up out of pocket if they use a company structure without a great deal of careful thought and planning.

Many large corporates though have also, over the years, insisted upon the use of personal service companies by their contractors. This is to enable the 'employer' to pay the contractor's company without having to worry about PAYE or employment law. Such an approach reduces the 'employment' cost to the 'employer' and shifts any tax risk to the contractor - who might otherwise be deemed to be an employee. This seems to be what the BBC has been told by HMRC.

The tendency for people to seek to reduce the tax on earnings through the use of personal service companies was the rationale for the now notorious 35th Inland Revenue press release notice on Budget day 1999. Ever since then 'IR35' has been used as an abbreviation for the subsequent legislation that applies to personal service companies.

I have written previously on this blog about IR35 and how fears about it's application are often overstated eg: Is it IR35 or the pressure to work as a quasi employee?

The key points in the Sunday Times article then are:
  • Many BBC stars have set up personal service companies to avoid the new 50% tax rate that comes in next year. - IF, and only IF the stars in question were previously on staff then this may be a fair accusation. I suspect however that this is journalistic licence and that the use of personal service companies long predates the announcement of the imminent new top rate of tax.
  • HMRC told BBC to either take the freelancers on as employees or require them to set up personal service companies. - This is the advice that tax advisers often provide to employers whose freelance workers are at risk of being identified as employees. It shifts the tax risk from the 'employer' to the 'employee'. When an employer, such as the BBC is found to be making payments to freelancers who are later identified as employees the 'employer' becomes liable for back taxes and penalties for failing to operate PAYE. If a freelancer supplies their services through a personal service company it is that company that becomes at risk if HMRC challenge the disguised employment status of the BBC stars. If HMRC did suggest this to BBC then clearly HMRC considers that the freelancers are potentially BBC employees - under the arrangements then in force - which may of course have since changed.
  • The arrangement is less beneficial for the British taxpayer - This is because the BBC is avoiding the payment of employer NICs on payments that would otherwise be 'salaries' and because the tax payable by the stars (looking at both the corporation tax payable by their company and the income tax they pay on money paid out of their companies) is less than the PAYE tax that would be due on their 'salary'.
  • Many freelancing BBC stars are effectively employees (as are those named as such in the article) - In which case surely HMRC plans to apply the IR35 rules to those companies. And if successful then the only people to lose out will be the stars themselves. IR35 effectively removes the hoped for tax saving that comes from paying corporation tax and then dividends - with income tax due thereon at a later date. But if HMRC plans to attack the companies using the IR35 rules surely the article would have reported this?
And yet there is no mention of IR35 in the article. My conclusion is that either:
  • HMRC are not seeking to challenge the disguised employment status of freelance BBC stars;
  • The employment status of the freelance BBC stars in question is NOT as cut and dried as the article suggests;
  • HMRC do not want to risk losing what would be a high profile case that exposes the flaws in the employed vs self employed rules which are one of the foundations for the IR35 rules;
  • The article has omitted reference to the contrary argument that would make the piece less newsworthy.
Answers on a post card (or as comments below please).

ps: If you want a smile - check out the sponsored links on the Times own website if you search for - tax bbc freelancers (Surprisingly the article I was seeking didn't appear though!)


  1. Hi Mark,

    Thank you for an informative take on this article.

    I am now going to browse through to look at anymore IR35 articles you have written.

    Now why didn't the BBC ask for your expert opinion?:-)x

    Enjoy your day.

    Kind regards and many blessings



  2. Good thoughts Mark. I read the Sunday Times article, and much as it covered the core issues of transparency and tax payers funding well, the one issue the article lacked was any thought on IR35.

    The return of above 40% taxation will again tip the balance towards tax advice services, and hence a revival of service companies. If everything else stays in balance, then the admin charges versus the potential savings suggest more again will move that way. It also has to be taken into account that the anti-IR35 lobby will again be further funded, now by the unhappy and now 50% taxed!

    We have to face up to the fact that as a country, our books are out of balance: if Gordon Brown has accepted it, not sure why the rest of us wouldn't. To solve the problem means an reduction in spend and an increase in tax. I think the Conservatives can get away with allowing a 50% rise deemed necessary under Alastair Darling and win an election if they promote it as a short-term austerity measure. A long term move to a 50% tax rate is an acceptance that the Thatcherite entrepreneurial spirit is dead, buried and well composted.

    PS: when was the last time anyone saw Fiona Bruce on ITV?

  3. Mark

    I can assure you I did discuss IR35 with the Sunday Times

    That was not the focus of their attention

    I'm sorry that this is just an anti BBC article really - as I explain here