IR35 changes in the entertainment sports and media sector
Due to the nature of the sector, the entertainment, sport and media sector is one where traditionally there have been several off-payroll working arrangements. Certainly, this is the case for most clients we work with in the sport sector with various off-payroll officials, sports stars, coaches and expense arrangements for volunteering. This is an issue across the whole entertainment industry as well, from actors and production workers to other freelancers.
The Government has become increasingly concerned by an emerging tax gap in this area. There have also been several high-profile employment status cases such as Pimlico Plumbers and Uber which continue to highlight this very grey issue to businesses both from a tax but also an employment rights perspective. We have seen in the last year the unsuccessful Jess Varnish case against both British Cycling and UK Sport which claimed employment status for UK Sport funded athletes, which would have had significant implications across Olympic programmes.
Another current ongoing case is Professional Game Match Officials Limited (PGMOL) vs. HMRC. HMRC were unsuccessful in arguing that certain top-level referees were employees of PGMOL but have since appealed to the Upper Tier Tribunal, with the case understood to be heard early next year.
In particular, HMRC has expressed considerable concern over the years about the lack of revenue the IR35 legislation has generated. The first steps to rectify the ineffectiveness of the IR35 legislation started in April 2017 and saw changes within the public sector. This was highlighted within the media with various cases against BBC presenters. The draft legislation aligning the legislation to the private sector will likely come into effect from 6 April 2020.
This is likely to have a significant impact on our sector and those who currently work within it. At present, where a business engages an individual via an intermediary, normally a personal service company (PSC), then the PAYE and Class 1 National Insurance compliance obligations rest with the service company. A summary of the proposed changes includes:
- the engager will be responsible for operating the legislation which will apply where the services are provided via an intermediary, typically the worker’s PSC but would otherwise be considered an employee of the engager;
- where the PSC is supplied via an agency, or agency supply chain, the agency closest to the worker in the supply chain will be responsible for operating PAYE and Class 1 National Insurance on the fees paid;
- workers will no longer be able to claim the 5% deduction for general costs;
- where the engager is deemed to be small the intermediary will retain responsibility for operating the legislation;
- for incorporated businesses, the Companies Act definitions test will need to be considered to see whether the legislation will apply. It is currently only drafted to include medium and large sized entities (see table below);
- where the engager is an unincorporated business, only the annual turnover test will apply but it will need to be considered on an annual basis, rather than the two-year test which will apply to incorporated businesses;
- for both incorporated and unincorporated business where they cease to be regarded as small, the legislation will need to be operated from the beginning of the next tax year.
Where two of the following three conditions are met during two consecutive accounting periods, the incorporated business will need to operate the off-payroll worker legislation:
|Balance sheet total||£5.1m|
|Number of employees||50 or more|
Although this specific change in legislation only impacts medium and large sized entities, small organisations may wish to consider their arrangements with sole traders/consultants not paid through PSCs. Although nothing has changed in this area for you, these changes show greater focus in this area as well as increasing risk.
Where the legislation is due to apply on payments made to an off-payroll worker, the business must:
- provide the worker and any agency in the supply-chain with details of their decision as to whether the legislation will apply;
- the decision which determines whether the worker would be a direct employee of the engager were it not for the presence of the intermediary must be provided within 31 days of the engagement.
The draft legislation makes provision for the worker's right of appeal against the decision of the business. The engager must respond within 45 days setting out the reasons why they believe the legislation is applicable or provide confirmation that they have changed their mind and the worker is not caught by the legislation. It is proposed that all disputes in the deemed employment status will be resolved by the engager and intermediary (although any agent within the supply chain can provide a determination). The Government is due to publish guidance to organisations as to how they should resolve any disputes. HMRC has enhanced its check employment status for tax tool (CEST), with further changes promised before the end of the year.
Check employment status for tax
This tool is designed to help guide the decision-making process for taking on and reviewing current arrangements. HMRC have admitted that this tool is not perfect and are planning to make improvements over the next 6 to 12 months. What they have said though, is if the information going into the tool is factually correct, then they will stand by the decision created as an output. Anecdotally however, we are aware that some clients have tried using the tool to reach the decision of inconclusive, which is where you will probably need professional advice.
This issue therefore, has the potential to significantly impact the sector. If you are highly leveraged on off-payroll workers, then there are potential huge cost implications from national insurance to holiday pay and pension costs. Now is therefore a good time for businesses to be reviewing their existing worker supplier chain and contractual arrangements to see whether the proposed IR35 legislation will apply and if so, the potential impact. Even those with small numbers of individuals caught should consider the impact mainly from a commercial point of view. With the high-profile nature of the sector, there are likely to be reputational challenges for not complying. From experience those interacting in this way tend to be key individuals to organisations. If the likelihood is that they will be treated as an employment engagement post 6 April 2020 then those negotiations should start in earnest.
The views expressed are the author’s and not ICAEW’s.