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
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
Future Online Ltd v Foulds [2005] STC 198
Bridges and others v Industrial Rubber plc [2004] UKEAT/0150/04
Bunce v Potsworth Ltd trading as Skyblue [2005] EWCA Civ 490
- Inspectors are aware that re-categorisation as an employee will produce Primary and Secondary Class 1 national insurance contributions, effectively a tax - whatever the government says. There is less of a 'take' from Class 2 and Class 4 NIC. Self-employed earners also have more scope for claiming allowable expenses for tax purposes.
- Individuals taxed under PAYE are effectively under government 'tax control'.
- In many instances it is not necessary for an employed earner to complete and submit a self-assessment tax return. There is a substantial administrative saving, as most of the PAYE administration is completed by the employer.
There is a well-know list of badges of trade, which are supposed to support a claim for self-employment or demonstrate that fact. I say 'suppose', because in some tribunal and other cases the Commissioners and judges appear to have overlooked the importance of these badges of trade to one degree or another.
- The overall view
- Contracts
- Control
- Substitution
- Mutuality of Obligation
- Part and parcel of the organisation
- Other clients
- Subsidiary Issues
Other factors that may or may not assume importance in particular cases include:
- Evidence of being in business on one's own account.
- Evidence of the taking of business risk.
- Provision of equipment.
- Length and number of engagements and exclusivity.
- Payment terms and method of payment.
- Provision or not of benefits.
- Rights of termination.
- Absence or not of holiday entitlement and holiday pay.
The following recent case concerned an employment status review suffered by a large scaffolding organisation that engaged self-employed subcontractor scaffolders. I am indebted to Sean Wakeman and Numerica LLP for permission to include the details.
Brian asked a question about a microbiologist client on 14 November 2004. The client in question works mainly for two private hospitals and has fallen foul of an Inland Revenue status enquiry that was not communicated to the adviser. Unfortunately he returned the HMRC questionnaire without contacting his adviser.
Without commenting on the facts of this case, which indicated self-employment to me, the factor to emerge from this case was that clients must tell their advisers if status inspectors approach them. Any questionnaires should only be submitted after good professional advice.
Cathy Ratchford enquired about letters that are being sent to main contractors and subcontractors, in her query of 16 August 2004. As I understand it there are six 'loaded' questions in the letters sent to subcontractors.
Both 'Mike' and David Heaton suggested that it would be wise to review the situation for each subcontractor before HMRC took any further action. Each case depends on its own facts, and computer driven questionnaires may well have come to the wrong conclusion.
Brian introduced a case where the client had dealt with an employment status enquiry form without reference to him, in his query of 10 July 2004. The inspector had made a ruling that the client was employed, a decision with which the adviser did not agree. What can be done now?
As I stressed at the time, the client is at fault here. However, all is not lost if the client wishes to fight the decision, and has the funds to do so. Re-negotiation with the inspector would be a starting point. Self-employed accounts and tax returns could be submitted. Ultimately the Commissioners and courts have to decide the issue.
Status enquiry - error by the inspector?
Daren Peacock mentions an oft-repeated situation in his query of 6 May 2004. An HMRC status enquiry concluded that a client was employed, but the question of 'control' was not addressed. This was despite the statement in the Employment Status Manual at ESM1013 that 'where an engager has no right of control, there will not be a contract of service'.
This query highlights the annoying habit of HMRC, tribunal chairmen and judges of ignoring, when it suits them, important relevant statements made about status in some instances. Respondents made some good points about control, but in the end it is up to Daren and his client as to whether they want to fight the case further or not. Do they have the time, funds and determination to do so?
Do sub-contractors have a special concession from IR in respect of status?
'Fred' asked this one on 1 September 2003. Paul Soper replied unequivocally 'no', and added that the onus was on the 'employer' or client company. If the HMRC challenged status, it was the main contractor who would undoubtedly have to pay any PAYE tax and NIC found to be due. In the past HMRC often turned a blind eye to one man labour only subcontractor abuse, but this has now been radically tightened up.
Self-employed status of performers
Philippa explained, on 19 March 2003, that a client was intending to put on improvisational dramatic performances. They will be working for a short period on this project, and include lighting and sound technicians, performers and a director, all of whom are registered as self-employed. Is there any vulnerability of self-employed status in this situation?
Stanley Harvey rightly commented that the client must obtain the current tax reference for each person involved, not just their NI number. I would have thought that, as the people involved are already registered as self-employed, there was little danger of HMRC attack in this instance.
A Wells queried this one on 22 September 2004, in relation to holiday cover for a conveyancer in a solicitor's office. One commenter disclosed that he had plenty of GP medical locum clients, who were still being accepted as self-employed. Normal status rules will apply. There is probably an element of control, but a lack of mutuality of obligation.
Self-employed status guidelines
Jenny gave a speech as guest speaker for an organisation and subsequently invoiced them for an agreed amount. The finance department of the organisation have now asked her to complete a form with all sorts of questions based on IR guidelines. She asked, on 26 May 2004, for any comments.
I commented at that time that this was an appalling discourtesy by the organisation. One suspects that they are 'covering their back', possibly due to a previous PAYE Audit. As Phil Rees rightfully pointed out, this request is 'rubbish'. The issues of substitution and mutuality of obligation make quite clear that Jenny was operating in a self-employed capacity.
Daren Peacock, on 4 March 2004, highlighted the case of a worker who had a previous ruling in 1996 that he was self-employed for the years 1987-1994. Another Inspector has now had a meeting with the client company (without Daren's knowledge) resulting in the issue of regulation 49 assessments on the client company for later years. Advice on this issue was requested. I would add that this is another instance where clients must be persuaded to communicate with their advisers before damage is done.
Steve suggested that reference was made to the Employment Status Manual at ESM0005. HMRC is obliged to help taxpayers get their affairs right, and if the facts were honestly presented on the previous occasion and the inspector then gave an opinion and the facts have not changed, then the client company is entitled to rely on assurance given
Paul Dorrington suggested that Accountax Consulting Ltd be approached to assist in this case.
Readers with a current case should post their query in Any
Answers.