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TaxZone Newthwire 83 - Employment Status Issues

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22nd Aug 2005
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Editorial Note

The fact that self-employment is not defined in the Taxes Acts or other law continues to spawn cases that proceed to the Commissioners and the courts, and regularly exercises the minds of accountants whose clients may be in a 'grey area'.

Whether such lack of definition is deliberate or not is hard to say. The whole issue is a complex one, as an increasing number of employment law cases are being heard by the tribunals and decisions are being made that appear to conflict with existing tax case law and tribunal decisions.

The consequence of all this is an extremely confused situation, where it seems that every disputed case must be decided on its own facts.

I had hoped that the HMRC paper 'Small Companies, The Self-Employed and The Tax System' would shed some light on this 'minefield' but I was sadly mistaken. Neither did the ICAEW Tax Faculty paper TAXREP22/05, under the same name, clarify matters to any degree.

I shall therefore, in this wire, seek to summarise where we are now, review the latest court and tribunal decisions and spend some time reviewing the many 'Any Answers' queries on this subject.

John Newth

Editor, TaxZone

[email protected]


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Contents

1. IR 35

The subject of employment status is inextricably linked with IR 35, as all the IR 35 cases that have been heard by the Commissioners and the courts up to now have been fought on the grounds of whether the owner of the personal service company would have been self-employed or employed, without the interposition of the company.

These cases have been summarised in previous wires, which include:

Issue 4 - 24 June 2002 - Employed or self-employed?

Issue 14 - 11 November 2002 - Hope for IR 35

Issue 33 - 18 August 2003 - IR 35 and Status update

Issue 65 - 24 November 2004 - IR 35 case update

Contents

2. Recent Cases

I do not intend to discuss in detail the cases that have been reviewed in previous wires, but comment on the most up-to-date ones. These are:

Future Online Ltd v Foulds [2005] STC 198

The High Court confirmed the decision of the Special Commissioners that the contracts came within IR35, and the taxpayer owner of the company was therefore adjudged to be, effectively, employed.

Netherlane Ltd v York SpC 457

This was another case concerning national insurance contributions and a computer systems specialist who operated through his personal service company. The case prepared by Mr Renshaw's accountant ran to 74 pages, and that of HMRC to 25 pages. The personal service company, through an agency, obtained a contract with a life insurance company for consecutive 26-week periods.

As in similar cases, the contract was headed 'contract for services'. The appellant would give priority to the work of the client company and specified an obligation of 'five professional working days' a week. It became clear that Mr Renshaw was under the control and management of NPI, which was no doubt fatal to his case, and he was also designated team leader or project management leader. He was required to report to a named manager. Pay was made on the basis of a timesheet and was made at a rate per working day. The contract was terminable by NPI on four weeks' notice. The appellant had been employed previously for 18 years by a life insurance company.

The Special Commissioner, Dr John Avery Jones, confirmed that the legislation required him to establish the terms of a hypothetical contract between Mr Renshaw and NPI. He considered that mutuality of obligation was satisfied by NPI's agreement to pay a certain rate of pay per working day. There was no credible right of substitution. Mr Renshaw had no other clients at the time of the contracts. Subsidiary issues were that Mr Renshaw provided his own laptop and mobile phone and he received no employee benefits. However, the Commissioner held that he was clearly 'part and parcel of the organisation'.

In dismissing the appeal the Special Commissioner observed that more actual evidence regarding the practical outworking of services supplied would be helpful in similar cases.

Bridges and others v Industrial Rubber plc [2004] UKEAT/0150/04

Just to make us all even more confused the decision of the Employment Appeal Tribunal in this case held that, for a relationship of employer and employee to exist, there must be mutuality of obligation and that mutuality of obligation means that the employer has undertaken to provide work and the employee has undertaken to do it.

If there is not a promise to provide work and the counter promise to do it there is no contract of employment, whatever the circumstances of the case. This case concerned outworkers whose contract stated that 'for any pay reference period the company shall be under no obligation to offer work and the home-worker shall be under no obligation to accept work from the company'. Accordingly the claims of the workers for unfair dismissal and/or redundancy pay failed.

The decision in this case completely contradicts the view of HMRC that all that is necessary for mutuality of obligation to exist is that 'the engager must be obliged to pay a wage or other remuneration and the worker must be obliged to provide his or her own work or skill'. Reference can be made, in this connection, to the Employment Status Manual at paragraphs 514 and 1071.

It can be seen that, although mutuality of obligation was only part of the issue in Netherlane, the decision of the EAT in Bridges also contradicts the view of the Special Commissioner in Netherlane.

Bunce v Potsworth Ltd trading as Skyblue [2005] EWCA Civ 490

This was an employment law case concerning a welder who, through an agency, worked for rail track companies. His appeal against unfair dismissal as an employee was dismissed in the Court of Appeal. The court upheld the finding of the tribunal that the lack of mutuality of obligations between the agency and the individual was fatal, and apart from this factor the agency did not exert sufficient day-to-day control in order to make Mr Bunce an employee.

Lord Justice Keene articulated what many feel when he stated: 'What is clear is that there is now a large and growing number of people in full-time or nearly full-time work who, because they work under agency arrangements, do not enjoy the full range of employment rights conferred under the legislation on those working under more conventional arrangements'.

Contents

3. Re-categorisation

Why is HMRC so keen to re-categorise workers as employees, and why are some employers so ready to go along with this objective? It seems to me that, in disputed cases, the HMRC view is that:

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