Taxpayer 1 Inland Revenue 0

JOHN T NEWTH FCA, FTII, FIIT, ATT reports on a successful conclusion to an employment status case.

THE QUESTION AS to whether a worker is employed or self employed is a perennial problem. There is no definition of employment and self employment in statutory law and the ever-increasing list of cases tends to confuse rather than resolve the situation. It is understood that the role of status Inspector in a Taxpayer District Office is just about the most unpopular job in the office. This is a record of a case that I dealt with during the past few years.

How it all started

One day I was approached by a sole practitioner to ask if I would assist in the resolution of an employment status case. This was not an occasion where representation was required for a single worker, but for the main contracting company itself. In the industry in which it operated, it used thirty or forty subcontract workers. Some of these were semi-retired after distinguished careers in uniformed organisations. Others had full-time employment, but earned some 'pin money' as subcontractors. Others had a series of self-employed engagements.

Terms of the contract

It is instructive to note that the contracts did not demonstrate all the 'badges of trade' listed in the Inland Revenue's Employment Status Manual and other publications. Because of the nature of the client's business, which I cannot reveal, there was an element of control.

Nevertheless the contracts stressed some important factors. First, it was the intention of both parties that the arrangement was one of self employment, and the document was headed 'contract for services'.

Second, the contracts contained the following statement:

'There is no obligation on behalf of the company to provide work or on the part of the subcontractor to accept work offered.'

Each subcontractor was required to arrange and pay for his own indemnity insurance, and was obligated to pay his own National Insurance contributions, income tax and VAT. In actual fact, a number of subcontractors had already agreed their Schedule D accounts with the Revenue.

Invoices were to be provided to the company, incorporating fees based on a rate per hour and expenses. Delegation of work could only take place with the agreement of the company.

The first mistakes

Before I came on the scene, three crucial mistakes had been made, over which I had no control. The first was that the managing director of the company, in all innocence, had drafted what was supposed to be a contract for services. However, the terms of this simple document were much more like a contract of service for an employee.

The second mistake was that the auditor and accountant of the company allowed the pay-as-you-earn audit officers to undertake an audit of the company in his offices without being present himself. Readers should never allow this scenario to occur.

The final mistake was that the managing director, in all innocence, produced the 'contract' during the meeting. Not surprisingly, this was grabbed with glee by one of the pay-as-you-earn audit team who immediately exclaimed 'all these people are employees'.

My involvement

It was with this unpromising situation that my involvement in the case began. I was handed a letter from what was then the local Collector of Taxes following up the findings of the pay-as-you-earn audit team.

My first task was to meet with the managing director and auditor and find out the exact details of the relationship between the various subcontractors and the company. Apart from the intention on both sides that they should be self employed, the subcontractors had the right to turn down work, so that there was an absence of mutuality.

Recovering lost ground

Armed with this detailed information, it then became clear that the best course of action was to engage an employment lawyer and arrange for contracts for services to be drafted which reflected the true relationship between the company and its subcontractors. This was accomplished and the draft contracts were submitted to the Inland Revenue.

Long negotiation

There then followed an exchange of letters which lasted well over two years. Admittedly there were some delays on my side, due to the difficulty of obtaining information from the client, but there were also some major delays by the Inland Revenue.

It became clear that, on at least one occasion, the file had been sent to Inland Revenue head office for review.

Those readers who have been involved in status negotiations with the Revenue will know that these are centred around the 'badges of trade' so beloved by Inspectors.

My defence against these was to draw attention to those factors in the current case which demonstrated self employment, at the same time drawing attention to the numerous case law decisions which were of assistance.

It must be said that more modern judgments take into account the intention of the parties, an overall view and the necessity of mutuality of obligation.

At the time of my negotiations, the Inspector had not taken this on board. It also emerged that there were certain cases which the Revenue definitely disliked, notably Barnett v Brabyn [1996] STC 716.

After a period it became clear that deadlock had been reached and another line of attack was needed. It was necessary to call the Inspector's bluff. With the agreement of the managing director of the company, I then arranged to brief tax counsel in the matter, and informed the Revenue that the case was being appealed to the Special Commissioners.

An initial conference was held with the barrister concerned, and it must be stressed that we had every intention of going ahead with the appeal. Intimation of the appeal to the Revenue was in no way a hollow threat.

Instructing counsel

Many readers will now be conversant with the procedure of instructing tax counsel, and be aware that this can be achieved without going through a solicitor. Most of the main professional institutes have made arrangements for this to happen in one way or another.

In fact, I summarised the points at issue and basic facts on a single sheet of A4 paper and photocopied all the correspondence between the Revenue and myself. This was sent to the clerk to the chambers with copies of the contracts for services and other appendices. These documents and various other matters were discussed at a subsequent conference, at which the managing director of the company was present. The basis for going to appeal had been agreed.

The meeting and after

Readers will not be surprised that the reaction of the Revenue to a proposed appeal to the Special Commissioners was to try and institute delaying tactics. The department could ill afford to lose yet another status case, details of which would be in the public domain.

Therefore the Inspector dealing with the case suggested a meeting at his offices, which the managing director and I attended. When we arrived, we found that also in attendance was the compliance manager of the Taxpayer District Office concerned.

In some ways, the two-and-a-half hour meeting was very similar to an investigation or enquiry meeting, and readers should be aware of this possibility and ensure that they are suitably prepared for this. The conclusion from the Revenue point of view was that if we accepted employment status for each subcontractor from the following 5 April, then the Revenue would not seek to issue Regulation 49 assessments for the past six years. In the alternative, if we persisted in contending self employment, then the threat was that these assessments would be issued by the Revenue.

The managing director, who had held a senior post in a uniformed organisation before going into business, was not amused by the Revenue's tactics, which he referred to after the meeting as 'intimidation'.

Post-meeting negotiation

There then followed a certain amount of post-meeting negotiation and some argument about the notes of the meeting. However, the client and I stood firm in our submissions and, unknown to us, the file had been returned to Somerset House yet again for review.

A famous victory

A month or two later, and quite out of the blue, I received a letter to state that the Revenue, in all circumstances, was not pursuing its contentions that the various subcontractors of the company were employees.

This was very welcome news, but the fact was that the whole process had taken four years and costs had been incurred by the main contracting company. It is clear that the procedures undertaken and costs incurred could not be justified where one was appearing for an individual independent contractor. I have had success in another case acting for an individual taxpayer, but even then the fees were quite substantial. The Revenue is not bound by such constraints. One has to balance immediate costs against long term gains and make a commercial decision. Nevertheless, in this case success had been gained.

Issue: 3867 / Categories: