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Revenue & Customs Brief 19/12

National Insurance Contributions (NICs): HMRC’s position following the Upper Tribunal decision in the case of ITV Services Ltd.

This brief confirms Her Majesty’s Revenue & Customs’ (“HMRC”) position following the decision in the case of ITV Services Ltd (“ITV”) at the Upper Tribunal (“UT”). The case concerned the application of the Social Security (Categorisation of Earners) Regulations 1978 (“the Regulations”) to payments made to actors engaged by ITV under specific contract types. The tribunal found against ITV and upheld the decision of the First Tier Tribunal (“FTT”) (see R & C Brief 10/11 issued 2 March 2011) that the actors’ contracts provided for remuneration by way of salary and there was liability for Class 1 National Insurance contributions (“NICs”) under the Regulations on all the remuneration payable under the contract types.

You can read the full text of the UT decision on the Tax Tribunals Service website ITV Services_Ltd_v_HMRC (PDF 82K) (Opens new window)

Readership

Any individuals or businesses engaging entertainers as actors, singers or musicians; or in any similar performing capacity, and the representative bodies for any of these groups are advised to read this brief.

Action required by those engaging entertainers

The decisions of the FTT and UT in the case of ITV have clearly stated the law on the matter. HMRC now expects those in the industry engaging entertainers to comply with the Tribunals’ decisions.

Background

The Regulations relating to entertainers were introduced to provide earnings-related contributory benefit protection to entertainers. At the time the Regulations were introduced it was accepted that a small number of highly-paid celebrity entertainers referred to by the entertainment industry as “Key Talent” or “Marquee Talent”, would be excluded because they did not need earnings-related contributory benefit protection.

HMRC believed that the wording of the Regulations in 1998, as amended in 2003, excluded certain entertainers not paid by way of salary (as defined in the Regulations) and that one such group was those entertainers termed “Key Talent” . However, it has now become clear that many entertainers termed “Key Talent” are engaged contractually under terms which bring them within the ambit of the Regulations.

HMRC also believed that the majority of musicians not engaged directly under employment contracts were excluded from the Regulations because they were not paid by way of salary. The decision of the UT in the ITV case now clarifies that musicians’ contracts which HMRC previously believed to be outside the ambit of the Regulations, and where in some cases it had given a written opinion to that effect, are in fact within the Regulations.

The FTT in its decision of 23 November 2010 found that, except for the ITV “All Rights Contract”, where the contract specifies a fee without any relation to time taken, all other actors’ contracts including bespoke contracts (used extensively for engaging “Key Talent”,) provided for remuneration which included salary. One of the grounds of ITV’s appeal was that the FTT erred in concluding that the contractual payments computed by reference to the time services are to be rendered fell within the definition of salary in the Regulations.

The Upper Tribunal’s decision

The UT rejected the “are to be rendered” argument and all other of ITV’s arguments and decided that entertainers’ contracts are forward looking and the wording of the legislation is consistent with the natural contract-based interpretation of the notion of ‘remuneration’ and in the context of the NICs legislative regime. This means that the Regulations apply to any contract that provides for payment for the individual’s time for some definite or indefinite period (as opposed to being for a specific performance). However, the judge also observed that contracts that include reference to hourly payments such as overtime or overage payments, if and when paid, that will be computed by reference to time, fall within the ambit of the Regulations irrespective of whether such additional payments are actually made to the entertainer.

The effect of the Upper Tribunal’s decision

The UT decision has provoked comments from some observers from the entertainment sector as to the correct interpretation of the penultimate paragraph of Revenue & Customs Brief 10/11. In particular, a query has been raised as regards the category of entertainer to which the following statement was intended to apply:

“ HMRC is obliged to apply the law immediately to all Equity contracts that are newly entered into, revised, renewed or extended from the date of this briefing (2/3/11) and from 6 April 2011 in respect of all current Equity contracts that continue beyond the end of the 2010/11 tax year, which are of a type that had previously been accepted by HMRC as falling outside of the regulations”.

That paragraph referred to the liability for Class 1 NICs for all actors on Equity contracts. The second part of that statement made no concession for any specific type of contract, it simply deferred compliance with the FTT decision to the beginning of the new tax year in the limited circumstances where HMRC had previously given a written opinion that a particular contract (or contracts in cases where more than one actor are engaged on precisely the same terms in the same production) fell outside of the Regulations.

It has also been suggested that the following extract from the Employment Status Manual 4147 shows that HMRC previously took the view that those entertainers referred to by the industry as “Key Talent” are excluded from the Regulations:

“ The last bullet ensures that Key talent artistes are excluded from the Regulations as they will be contracted to appear in productions for which their remuneration is not directly calculated according to the period of weeks or months they are assigned to the production.”

HMRC is of the view that the above extract in respect of “Key Talent” artistes makes it clear that only those entertainers engaged without specific reference to time are intended to be excluded from the Regulations.

Various HMRC guidance published since 2003 clearly articulates that those “Key Talent” entertainers whose remuneration does not include any element of “salary” – that is the remuneration payable under their contract of engagement does not include any payment computed by reference to the amount of time for which work is performed – are excluded from the Regulations. See particularly Tax Bulletin Issues 65 and 74.

In its published “Guidelines on the Special NIC Rules for Entertainers (PDF 194K)”, HMRC clearly explains that the Regulations are to be applied to the exact terms of a particular entertainer’s contract in order to determine whether the earnings from the contract are to be treated as employed earnings for NICs purposes.

HMRC’s position going forward

“ Actors” and “entertainers” were referred to specifically in Revenue & Customs Brief 10/11. To clarify, liability for Class 1 NICs arises in relation to all types of entertainers (for example,. musicians, singers) engaged under contracts where the remuneration includes an element of salary (as defined in the Regulations).

HMRC has no plans to undertake concerted compliance activity in the media sector in respect of entertainers and the Regulations as a result of the ITV Services case. It will, however, continue to scrutinise those cases currently the subject of investigation and to apply its normal risk based approach to identifying cases which represent a high risk in terms of tax and/or NICs and it reserves the right to investigate such cases.

Where HMRC is undertaking, or undertakes, an investigation into an entertainer or media company, it will apply the law in terms of the Regulations as enunciated by the UT.

Retrospective application of the Upper Tribunal’s decision

The extent to which HMRC will seek to apply the UT decision retrospectively will be determined by a number of different factors.

Written opinion previously given

Where HMRC has previously issued a written opinion that Class 1 NICs are not due in respect of a particular contract because HMRC did not consider that it provided for payment by way of salary, it will not seek from the party to whom that written opinion was given retrospective recovery of the unpaid NICs that were due and payable prior to 6 April 2011(unless HMRC has expressly advised an engager that NICs should be operated from an earlier date).

Extent of a written opinion

Where HMRC has previously provided a written opinion to an engager that Class 1 NICs are not due in respect of a particular contract, and that engager used an identical (other than for individual personal details) contract to engage other entertainers in the same production, HMRC will not seek arrears of Class 1 NICs due and payable prior to 6 April 2011.

No written opinion previously given

Where HMRC has not given a written opinion, then it reserves the right to seek retrospective recovery of any NICs arrears under its normal risk based approach, and subject to the provisions of the Limitation Act 1980.

ESM 4147 will be updated shortly to reflect the position following the UT decision.

Further information

Under the terms of its “Non-statutory clearance” service to businesses, should an engager have material uncertainty on the tax (or NICs) consequences of a particular contractual engagement, if appropriate, HMRC can provide its view of how the law applies to that contract.

Any such requests should be made by formal ‘Non-statutory clearance’ application to Large Business Customer Relationship Managers, Film & Production or TV Broadcasting Units as appropriate enclosing details of the particular engagement and a copy of the relevant (signed) contract.

Issued: 14th June 2012