Self Employed Worker Claims He Was an Employee

Self Employed Worker Claims He Was an Employee

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....who might otherwise be regarded by HMRC as employees. We sometimes advise clients to seek the Revenue's judgement if the case is a grey area.

As a result, I'm all at sixes and sevens with a client who has slipped the net and ignored our advice. He, our self employed client, had a worker for two years or so who he regarded as self-employed. Pay varied between £2k - £6k per month (because commission was involved), paid at the end of each month by BACS into the worker's bank account. There was no paperwork on either side: that is, no invoice from the "self-employed" worker; and no payslip from our client, "the employer". Certainly no contracts for or of services in evidence.

Our client has gone bust and ceased trading, and the worker now claims that so far as he was concerned he was an employee, and that all payments to him were net of tax and employees' NI. On the face of it that claim seems somewhat justified, given that he was required to work set 9 - 5pm hours from an office and under supervision, he did not supply his own computers etc, and there was certainly no question of providing a substitute. It's a racing certainty that the Revenue would have ruled hands down that the worker was an employee, had they been approached.

A second worker was paid £3,000 per month but a weak contract for services (missing substitution and other major clauses) which the Revenue would probably blow out of the water was in place and signed by both parties.

As an additional matter, no Employers' NI has been paid of course. Can anyone please advise me what happens in practice in these circumstances? Are the Revenue likely to gross up the wages of either or both of these workers and charge tax and employees' NI to our client, the former "employer"? For years I've put the frighteners on clients by warning them they could finish up paying their workers' tax and NI if they don't take care with contracts for services - but is that likely to materialise in practice for this client?

Any knowledge or recent experiences would be greatly appreciated.
Andrew

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By User deleted
04th Mar 2009 13:58

Not Bankrupt, But...
Hi Fellowcraft,
Client is on his uppers, but no bankruptcy papers issued. He was teetering on the verge - financially challenged because his business closed, house was sold, and he will owe HMRC any amount of tax (he was self-employed) not to mention PAYE/NI if the workers he thought were self-employed are adjudged to be employees. He's currently on an extended holiday on the continent -I cannot be sure he'll ever return.

Both former workers are asking our client for employment- related docs ie payslips, p60, p45. They reach him by email or phone; then he passes the buck to us. I don't think all this is a question of holiday pay or redundancy - but purely tax. I imagine the workers have been advised to regard the payments made to them as net employment pay, which of course would save them paying Sch D tax and class 4 NI on their £60k and £36k "earnings".

I'm trying to gauge the likelihood of the Revenue taking a pragmatic view - by simply not challenging the workers' self-employment status and ignoring the deficiencies in their contracts that point away from self-employment - as it's the only way the Revenue are likely to collect any tax in this case (given that our client is (a) now residing abroad; and (b) most likely to go bankrupt if / when his creditors, HMRC included, catch up with him).

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By User deleted
03rd Mar 2009 16:57

.
I might have the wrong end of the stick here, but isn't your client bankrupt?

If so, then the Trustee is not likely to attend any Tribunal or oppose it. The worker can contact the RPO for advice and see whether he is eligible to claim, however this is privy between the employee, RPO and practitioner.

The Revenue may decide to revise their debt in the proceedings at their discretion.

You say the worker is claiming to be an employee - claiming to who though? - your client, yourself, the Trustee, a Tribunal, the RPO or HMRC???

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By User deleted
03rd Mar 2009 15:34

A Matter of Tax Yield?
To get a perspective, Steven has it nailed with "HMRC have every right to overturn the expressed intention of both parties in these cases". I suppose what I'm trying to evaluate, in a nutshell, is whether HMRC are likely to exercise that right given that the tax yield for pronouncing the arrangement to be employment would sure as eggs be £zero*; whereas accepting the obvious intention of self-employment would at least allow them to tax the worker.

*(note: "sure as eggs £zero" because the principal, our client, has closed his business, sold his house, and is currently residing in the sun. I can't see him returning in a hurry - not if he were to read David's piece regarding s9 of The Fraud Act 2006 ).

Paula, the major worker Mr No Contract (who received £60,000 plus) had an existing business of some years standing in a totally unconnected field. This really is not so much about redundancy (or, for that matter, VAT registration) but simply a matter of the worker capitalising on the lack of evidential paperwork in an attempt to avoid coughing up to the tax collector 41% of the £60k he received (and by that process creating a potential PAYE and NI headache for their "employer", our self employed client). Likewise Mr Weak Contract (£36k), who is following suit by claiming that he too was an employee and that £36k was net pay (Mr Weak Contract did register as self-employed immediately after obtaining this job, although I have no way of knowing whether he declared that his work would be for one principal).

By the way Paula, asking HMRC for an opinion on employment status is exactly what we advised this client to do with his weak contract. I guess it's the way we deal with people who contrive to produce a contract for services for what is plainly an employment situation - moreso when they cobble the contract together themselves. Now THAT'S wanting your cake and eating it! Patch together a DIY contract for services and ask your accountant to endorse it for free - let them carry the can! Ho ho, ho, here's HMRC's number, go ask them to mark your homework!.

I digress. That's a red herring.

Richard, your golf pro's regular attendance and availaibility sounds similar to both workers in this case: they worked set hours 9-5pm; leads were generated for them which meant they were largely office-bound; and had little in the way of autonomy. In short, they had to be there, do as they were told, and jump to it. Interesting that a tribunal would rule for both employment and self-employment. I wonder whether the Revenue might have taken a different view and voted for 100% self-employment for the club pro had your golf club owners abandoned the good ship Britannia and sailed off into the same blue yonder as my client? That's the straw I'm clutching at - I know if you or I were faced with the decision of receiving some yield or no yield we would opt for the former by voting for self-employment; the question is are the Revenue likely to do the same?

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By AnonymousUser
03rd Mar 2009 11:03

Paula - 'he can't have his cake and eat it ...'
... Oh yes he can! Sadly, employment tribunals and HMRC have every right to overturn the expressed intention of both parties in these cases. It annoys me intensely that someone can insist on being treated as self-employed with the benefits that brings but then go running to a tribunal when it goes wrong.

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By Richard Willis
03rd Mar 2009 09:48

This happened to a Golf Pro friend
Hi Andrew

A friend of mine was a Golf Pro at a hotel nearby. When it was taken over the new owners got rid of him as he was costing too much. They claimed his pay was a 'retainer' as he then charged for lessons himself and was therefore self employed. However when a tribunal asked them what they expected for their money and the answer was regular attendance from/to, available in the shop when not on the greens, etc. they decreed that in respect of his 'retainer' he was indeen an employee.

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By Paula Sparrow
02nd Mar 2009 23:46

Back to the original question
Why has this worker suddenly decided that he thinks he is an employee? If he registered as self employed (although it's not clear from the information provided whether this was specifically related to this appointment or has been in place for some time) then he must have thought at some point that he was self employed. Was he also paying Class 2 NI? He cannot have his cake and eat it!

As an employee I would be seriously concerned if I was not receiving payslips and year end statements from my employer.

My suspicion is that having seen his meal ticket going bust he is now looking for a fast buck in redundancy payments. There was a case about a year ago on a similar basis which the worker lost. Can't remember the details but will try to dig them out.

And why ask HMRC to give an opinion on employment status? Their track record through the courts is poor,especially in "grey areas". See Castle Construction and Littlewood as two of the most recent examples of the flaws in HMRC's view of status.

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David Winch
By David Winch
02nd Mar 2009 20:20

Phil and Steven

A technical point, which I don't think will be of practical significance in this case, arises in respect of trading whilst insolvent.

We are all aware of the criminal offence of 'fraudulent trading' in connection with a company. The offence (under s458 Companies Act 1985 or s993 Companies Act 2006) applies to dishonesty involving the running of a company involving the defrauding of creditors (of anybody), or for any other fraudulent purpose. (It is therefore quite a broadly defined offence.)

However it is sometimes overlooked that there is now a parallel offence involving the running of a business NOT through a company - see s9 Fraud Act 2006.

(There is also case law that suggests that a single isolated transaction - carried out fraudulently - can be regard as a 'business' in this context.)

David

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By User deleted
02nd Mar 2009 19:57

Thrashing Around?
Well spotted Steven, the client was indeed a sole trader. I'm nevertheless grateful to Rebecca and Phil for highlighting the additional tripwires for limited companies, as the same client also ran a limited company which is in a similar position albeit with smaller numbers. Top notch anticipation guys :) And thank you Rebecca, I guess I should ask for some advance fees.

Back to Mr Sole Trader: from the advice given it seems he will be held liable for tax and both flavours of NI; I had hoped to fish for an equitable solution, especially in the case of the worker with a weak contract for services, by which we might argue that it was the clear intention of both parties, Mr Sole Trader and his worker, that the worker be self-employed (demonstratable by the weak contract and the round-sum monthly payments, not to mention their absence from the payroll records).

I know, I know, the contract is unlikely to meet the self-employment criteria; yet faced with the prospect of trying to get blood from the stone that is our financially challenged sole trader, or whether to target his wealthier worker instead, one wonders whether an Inspector might just use his discretion to ignore the shortcomings in the contract for services - take a practical view if you like - and accept that the substance of their dealings was a self-employed relationship. In real life, it's rather obvious the worker is taking advantage of the weak contract and must be laughing his socks off.

Why should the Revenue take such a practical view? Because they are unlikely to get a penny from Mr Sole Trader (who is already teetering on the verge of bankruptcy) whereas the worker has juicier finances altogether and could be taxed for his self-employed earnings. I suppose a similar argument might be put for the worker with no contract. It appears both workers are registered as self-employed incidentally - Mr Weak Contract registered especially for his engagement with our client; Mr No Contract has been self-employed some years, but in an unconnected field.

Might the Revenue take a practical view on tax yield and opt to tax the worker as self employed? Am I making hay or clutching at straws I wonder?

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By AnonymousUser
02nd Mar 2009 16:58

OP's client was self-employed ...
so I assume we are talking personal bankruptcy not corporate.

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By AnonymousUser
02nd Mar 2009 15:37

But,
make sure that you do not create a fraudulent preference.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
02nd Mar 2009 14:52

Except
that there is potential personal liability for NIC which has not been paid. This would fall on an officer who failed to ensure that it was paid. However, it does rely on HMRC going through some hoops and the whole thing is now a fine old mess.

Get some fees in the bank before doing a lot of work!

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By AnonymousUser
02nd Mar 2009 13:03

Yes,

the Revenue are likely to gross up the wages of both of these workers and charge tax and employees' NI to your client, the former employer. There will also be interest for paying it late and penalties for getting it wrong.
If, as you imply, the employer is insolvent then the sad news is that tax is no longer treated as a preferential creditor.

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