Latest victory for Kaye Adams highlights absurdity of IR35

Kaye Adams has won her latest battle with HMRC over IR35 after her case was heard in the tax tribunal for a fourth time. Yes, really – four times. The case is a prime example of why IR35 is such deeply flawed legislation. At huge expense to both Ms Adams and the taxpayer, HMRC has failed, again, to establish that IR35 applied to her engagement with the BBC. Meanwhile, thousands of other contractor engagements are being pushed into IR35 by clients that are fearful of getting it wrong and, like HMRC itself, clearly don’t understand the rules.

Athol House Ltd, the company of which Kaye Adams is a Director, has been in dispute with HMRC for the best part of 10 years. Ms Adams won the case at the First Tier Tax Tribunal, and won again at the Upper Tier after HMRC appealed. HMRC appealed again to the Court of Appeal which didn’t provide a definitive ruling and sent the case back to the First Tier. That tribunal has confirmed, once again, that IR35 did not apply to the engagement.

Why is this case so important to HMRC?

The first two rulings centered on business-on-own-account tests. The tribunals felt that because Ms Adams was clearly ‘in-business’ IR35 did not apply. This is a major problem for the reformed version of IR35 which requires end-clients to make determinations. If being ‘in-business’ is critical to status, how can end-clients make those decisions? They do not know if the contractor is ‘in-business’; very often they make determinations before they even know who the contractor is, advertising the role as ‘inside’ or ‘outside’.

The tribunals had ultimately undermined the operation of the 2017 and 2021 reforms to IR35. HMRC had to appeal the decisions in order to protect the integrity of the reforms which they had fought so hard to get on the statute book.

Where does this latest ruling leave us?

For Kaye Adams the latest ruling confirms once again her self-employed status. It is a victory, but something of a hollow one I would imagine. The expense, anxiety and stress involved in fending off HMRC four times at tribunal will have undoubtedly taken their toll. Freelancers everywhere, in my opinion, owe Ms Adams a debt of gratitude for repeatedly standing up to the stubborn might of HMRC, who have a limitless pile of taxpayers cash they can throw at the legal expenses involved.

For everyone else who is looking at this case and wondering what it will mean for their own status determinations, things are still unclear. Although this is the fourth time the case has been heard, due to the unusual merry-go-round through the courts, this latest ruling is still just First Tier, which means it can still be overturned by a higher court.

The whole thing is utterly unsatisfactory and it shines a glaring light on why IR35 is so problematic. The government estimates the IR35 reforms will raise £2bn annually by the year 2026/27. But how much of that is money the taxman has a legitimate claim to? How much of it is generated by the confusion that surrounds the rules? And how much of it comes from end-clients and agencies being fearful of incurring liabilities for ‘outside’ determinations – liabilities which magically vanish when the determination is ‘inside’.

What happens next?

HMRC could appeal the case again. It would be outrageously unfair on Ms Adams were they to do so. She has proven three times in the courts that she has not avoided tax. That should be enough for any taxpayer.

For IPSE, it is more evidence that something must be done about this wretched legislation. We cannot go on with a set of rules that no one can understand and which impose a major obstacle to UK firms looking to hire freelance talent on a flexible basis. The government are at great pains to talk up the vital importance of economic growth – IR35 is an obvious barrier to that growth.

For those interested, you can read the full judgement here.