Newth Talks Tax - Tax writer of the year John Newth solves your tax questions
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Employment status
Peter Kilvington raised a detailed query regarding a construction industry client, in his query of 21 November 2006. A PAYE inspection took place as long ago as August 2004, where the employment status of some workers was questioned.
A follow up letter in the form of the standard letter as per the Employment Status Manual was issued to the client in December 2005. This letter gave the opinion that some workers were employees based on the Employment Status Indicator software. The reasons given were (according to HMRC) low indication of substitution, medium indication of control and medium indication of financial risk. It appeared that the inspector(s) had spoken to some subcontractors personally and had contacted others by letter.
On 21 November 2006 the company received assessments covering the years 2000/2001 to 2005/2006. Any advice given would be gratefully received.
Some helpful replies were given to this query. Stephen Kendrew stressed ‘don’t give up’ – most of the decided cases are in favour of the taxpayer(s). It appeared that contracts were in place. Just because substitution has not yet occurred, it doesn’t mean that the subcontractors do not have this right. It is the right that counts – see the cases of McMenamin v Diggles, Tanton v Express & Echo and the Ansell case.
Hall v Lorimer, Barnett v Brabyn and other cases illustrate that the non supply of materials and equipment is irrelevant, if this is what the contract states. HMRC pay little attention to mutuality of obligation, but it is a very important factor. See the cases of Carmichael v National Power and MAL Scaffolding. In Carmichael, lack of mutual obligation was decisive.
Paula Sparrow stressed that inspectors have no right to speak to anyone. She advises her construction industry clients to warn their subcontractors about this. The subcontractors, of course, have a perfect right to speak to HMRC, but many prefer to pass up this opportunity.
The Employment Status Indicator is recognised as flawed by the professions and is not currently binding. Ensure that the inspector sticks to the principles of the Ready Mixed Concrete case. To prove employment status one must have all three of personal service, control and mutuality of obligations. If one of these is missing the individual cannot be an employee.
Paula mentioned the excellent book by David Smith on Defending Employment Status, now probably published by Tottel. She also mentioned Accountax Solutions. The company has had outstanding success in acting for individuals and companies in status disputes, including many construction industry cases.
I would add three other points to the excellent ones made by members. First, employment and self employment are matters of law and are not defined in statutory law. HMRC may state that someone is an employee, but they may have to back up this assertion before the Commissioners and courts.
Second, the current campaign by HMRC regarding the reclassification of subcontractors and the new CIS regulations introduced from 6 April 2007 make it that much harder for construction industry clients and their subcontractors to defend their position. However, as Stephen says, ‘don’t give up’.
This point is vital as, barring professional expenses insurance cover, fighting a status case is going to cost a lot of time, determination and money. I know this from personal experience. The client construction company and each subcontractor have to be united in such an initiative, and the subcontractors need to be aware of the employment law disadvantages of being self-employed before they become involved in any action against HMRC.
Previous editions:
Newth Talks Tax - Rent a room & student lodgers
Newth Talks Tax - Professional fees on an investigation
Newth Talks Tax - Golden hello
Newth Talks Tax - Employment status professional sportsmen/women
Newth Talks Tax - Tax on pastors
Newth Talks Tax - Marginal rate of income tax
Newth Talks Tax - Allowable Schedule D Expense?
Newth Talks Tax - Tax assessment
Newth Talks Tax - Revenue powers
Newth Talks Tax - No accounts submitted to IR for 10 years
Newth Talks Tax - Inland Revenue – Gone fishing?
Newth Talks Tax - New client wishing to come clean
Newth Talks Tax - PPR relief and lettings relief
Newth Talks Tax - Self/employed shareholder
Newth Talks Tax - Salary sacrifice for exam re-sit fees
Newth Talks Tax - PPR – Two houses owned
Newth Talks Tax - Employed – Not self employed
Newth Talks Tax - Hotels and the PPR exemption
Newth Talks Tax - CGT implications of PPR/letting
Newth Talks Tax - Handling the inspector
Newth Talks Tax - GPs receipt of donations