The BBC IR35 contractor case highlights fresh issues with the UK's gig economy
- UK tax law has come to bite the BBC and its contractor 'employees,' putting in question aspects of the gig economy and its HR consequences.
While there is tremendous enthusiasm for the gig economy among those who would otherwise be employers, a recent UK tax case brought against a BBC presenter coupled with related hearings in the UK Parliament highlight important risks of simply trying to recategorize employees as contractors.
The tax trap
In the UK, there is a well-established body of tax case law governing whether a person is considered an employee or is an independent contractor. the distinction is important for tax purposes because an employee's total tax cost is much higher than that of a contractor. Employers, for example, have to find an extra 12% of gross employee wages as National Insurance Contributions (NIC), while employees pay a higher contribution as employees and have restricted expense deduction rights.
Independent contractors can also regulate their tax exposure in any particular year through the use of limited liability companies. Net-net, being an independent contractor is both cost effective and tax saving for both sides of the employee/employer relationship.
The Christa Ackroyd case
Over the years, HMRC, the UK's taxing authority has sought to narrow the scope of what constitutes contractor status through a combination of legislation known as 'IR35' and test cases. Legal beavers, on the other hand, have sought to circumvent IR35 by establishing legal structures that insulate the 'employee' from IR35's precepts. The BBC case, which involved Christa Ackroyd, a former TV presenter, was won on appeal by HRMC. She now has to fork over just shy of £420,000 in back taxes.
At the time, Ms Ackroyd was quoted as saying:
Ms Ackroyd said during the hearing that she felt victimised by the BBC and made a scapegoat following an internal inquiry into the BBC’s use of freelancers.
“Looking at the details of this case, I have a lot of sympathy for Christa Ackroyd because the BBC encouraged her to work this way and her advisors were clearly out of their depth on IR35,” said Dave Chaplin, founder of ContractorCalculator, an online portal for freelancers and contractors.
BBC slammed by Parliament
Yesterday in front of a Parliamentary Committee, BBC presenters painted a grim picture:
“Compelled,” “coerced” and “bullied” – words that presenters at the BBC gave yesterday to describe how the BBC more than just “encouraged” them into Personal Service Companies.
To prove their claims to MPs, the presenters shared BBC-authored memos ‘not threatening but leaving no other choice’ than to use a PSC, summed up BBC World anchor Kirsty Lang.
“For the avoidance of doubt,” the BBC wrote in 2011 to radio presenter Stuart Linnell, “if any future contracts [of yours] are renewed…you’ll be required to have a limited company”.
Similarly, DJ Liz Kershaw shared that she was told by the BBC, also in writing: “We can only offer [you] the…role via a company or partnership. We cannot agree to any exceptions”.
My conversations with a variety of tax accountants suggest that the BBC handled this badly and that those caught up in this current sweep were ill-advised, regardless of their true tax position.
The fact remains that while it is still possible to set up a structure that works to the benefit of individuals within the confines of IR35, the legislation, and related cases are a minefield for the unwary.
The bigger problem
The bigger problem is that some government-related agencies, including HMRC, have been following a similar path to the BBC. In one case related to IT contractors, I heard that a group were deemed employees on one Friday, sacked and then rehired as independent contractors on ostensibly the same terms the following Monday. That's absurd by any stretch and means that any savings the department was hoping to achieve have been lost, albeit the current legislation puts the onus upon the individual to manage their affairs in accordance with the law and not the 'employer.'
In another case, I've heard that elements of the NHS are being privatized with the costs of non-core staff being transferred to outsourcing operations which in turn have changed workers rights for such things as sickness and pensions while at the same time seeing which of the people taken on board can be pushed into contractor status. The desired result is obvious - save money for public services.
Elsewhere, we have seen how Uber drivers in London have been re-categorized from genuinely self employed contractors to a kind of halfway house where they remain independent but have secured some workers' rights.
As I said in a much earlier piece on the Uber situation and the gig economy in general:
The problem for all parties involved is that the current written and case law around employment was never designed to deal with technology-enabled business models or working practices of the kind we see embodied in the Uber model. Right now that doesn’t matter because the judges, in this case, could care less about that aspect but it is not something that can be ignored.
The BBC case highlights an important aspect of the current situation that cannot be ignored.
Those employees who were perfectly happy as employees are being told they have to move to a different kind of status as a cost-saving exercise, but without either the protections that employee status provides or, as seems the common case, without fully understanding the legal consequences of getting it wrong. In my view that is an abuse of the already asymmetric relationship between employer and employee.
Whichever way you look at it, participation in what amounts to the UK's version of the gig economy just got a bit more precarious and both sets of parties will need to exercise considerable care before setting off down a path that could turn out to be faright with risk.
But I also see risk for organizations that pursue this path. Right now, it is not clear whether former employees who are caught in the IR35 trap as a result of changes in employer 'hiring' practice have a case to bring against their previous employer. We shall have to wait and see how that turns out. But hiring managers and HR leaders need to acquaint themselves with this area of UK law before ordering a refresh on systems legs and regs.
An overhaul of IR35 is needed. Contractor advocates regard the current state of affairs as deeply flawed and I can see why. Short-term cost savings that do not translate into value for both sides usually end up costing more in the long haul. Does anyone want that?
In the meantime, we understand there are about 100 BBC related cases which have yet to be settled one way or the other.