New NIC status rules for entertainers and performers

...this time for 'Luvvies', Entertainers and others in the Film and TV industry. Those involved in IR35 issues are well aware that actors and those working in the TV and film industry have had a starring role in the development of employment and tax status issues.

For example there is the pre-war case of Davies v Braithwaite, where an actress was found to be self employed on the basis that she had found “a method of earning a livelihood which does not contemplate the obtaining of a post and staying in it, but essentially contemplates a series of engagements and moving from one to another” and for whom each engagement “could not be considered an employment, but is a mere engagement in the course of exercising a profession”.

There was also the famous case of Hall vs Lorimer, in the early 1990’s, where a vision mixer who worked at the client’s premises using the client’s equipment was nevertheless found to be self employed.

However they also have their own sets of guidelines and rules by which the Revenue judges their status for the purposes of tax and NIC. Recently there has been a change in the rules and new guidance has been issued. In particular, the legislation governing their NIC status was changed in April 2003 by the Social Security (Categorisation of Earners) (Amendment) Regulations 2003 [SI 2003 No. 736]. And guidance for the Film and TV industry was updated in June 2003. Copies of the guidance notes to the new legislation and the Film and TV industry guidance are attached.

For those with time on their hands they make interesting reading. The new legislation, which takes effect from 6 April 2003 has been designed to bring more entertainers within the scope of class 1 NIC.

NIC

As the guidance notes to the new legislation records:

“Following the Special Commissioner’s case for McCowen and West the Revenue accepted that most performers/artistes in the entertainment sector were engaged under contracts for services and would generally be assessable to tax under Schedule D. However, it was acknowledged that to follow this line for NIC purposes would mean that the majority of entertainers who had previously paid Class 1 NICs would only be liable for Class 2 and Class 4 NICs which would not provide them with universal title to contributory benefits

DSS Ministers, therefore, decided that they would introduce regulations which would treat the majority of entertainers as employed earners for NIC purposes. This would enable entertainers to build up entitlement to contribution based Jobseeker's Allowance and ensure that, in a precarious industry, new talent could be encouraged to weather long periods without work whilst they established themselves.”

However, it appears that while most employed in the theatre are remunerated by salary and pay class 1 NIC, many in the film industry and some in the world of TV have increasingly been rewarded on the basis of pre-purchase payments as compensation for the loss of future repeat fees and rights and royalties worth many times the salary element. These do not qualify as salary and therefore do not attract Class 1 NIC.

The Government is concerned that most entertainers are not coming within the rules for Class 1. Hence the changes introduced in April which mean that any entertainer whose remuneration includes any element of salary will be treated as employed earners and liable to NIC.

Where the payment is a fee for the production, not a salary - and this would have to be made clear in the contract - the entertainer will remain self-employed for NICs purposes and liable to Class 2 and Class 4 NICs. The legislation apparently defines salary as follows:

”Salary is defined in the new regulations which requires that the following four of the five tests which formed the basis of the previous legislation described in the introduction to these notes need to be satisfied:

• made for services rendered;

• paid under a contract for services;

• where there is more than one payment, payable at a specified period or interval; and

• computed by reference to the amount of time for which work has been performed”

Interestingly “entertainer” is defined as including a “person employed as an actor, singer or musician or in any similar performing capacity. This includes such professions as dancers, voice-overs and walk-on parts.” . However it goes on to clarify that ” TV Presenters and news reporters are not regarded as entertainers for the purposes of the legislation”

(That must explain why I do not find Patrick Kielty or Graham Norton remotely entertaining although it seems a little hard on someone like Terry Wogan!)

Apparently session musicians and their deputies remain self employed for the purposes of the legislation.

Film and TV Industry Guidance

This is an update of guidance that was last revised in 2001. Amongst the issues covered by the guidance are such issues as which freelance and self employed workers can be paid gross and which have to be paid net of PAYE and NIC. There is an agreed list of jobs in the industry where workers may be treated as self employed, although most of these still depend on whether they supply their own equipment or work from their own premises, and the treatment may change if the engagement lasts more than 9 months.

Other issues that affect the situation are whether workers are engaged on jobs that last less than 7 days – in which case the engager does not have to deduct PAYE and NIC unless the worker is to be engaged frequently or at regular intervals. It is also possible for workers in the industry to obtain Revenue clearance as to their status even though they are within a grade that would normally be treated as employed provided they have demonstrated to the Revenue that self employed status should apply to a specific engagement.

Reviewing the guidance it seems strange that any engagers in the industry are prepared to deal with self employed freelancers rather than those who work via a service company. If they work through a service company all the complex rules and regulations fall away and the engager can pay them gross. Instead the worker becomes subject to IR35 and it is their service company that has to apply the detailed rules.

It would be interesting to know how many workers are involved in the film and TV industry working as self employed freelancers under these rules. It certainly appears that life for the engagers is made considerably more complicated while the Revenue must also have to invest significant resources in operating the special unit that deals with the industry.

One can’t but wonder whether the Revenue would be able to reach a similar accommodation with the knowledge based freelancing industry – for example by agreeing model contracts with bodies like REC which would automatically be treated as outside IR35. They appear to have reached such agreements regarding standard equity contracts and contracts used by musicians so in principle such understandings are possible.