It's A Fact

PAUL APLIN uses the Revenue's Employment Status Manual to great effect in establishing the self-employed status of a company's workers.

WHAT I WANT is Facts Facts alone are what is needed in life.' (Hard Times, Charles Dickens.)

Gradgrind has never been my favourite Dickens character, but he came to mind often during the case I am going to describe. The scope for using case law in a status dispute was illustrated by John Newth in his Casebook article 'Taxpayer 1 Inland Revenue 0' in Taxation, 25 July 2002. In another Casebook article 'PAYE Scare Story', Taxation, 24 October 2002, Mark Morton emphasised the importance of reminding status officers of their statutory powers. In the following case, careful use of the Inland Revenue's own Employment Status Manual brought success.

The beginning

It all started one wet and blustery Monday morning. Just as I breathed a sigh of relief that there was nothing in the post to spoil my day, the telephone rang. It was David, the financial director of Chard Coatings, a plastering company. It has a great logo and the name looks fine on paper, but whenever anyone answers the telephone I think of burnt toast.

'Had a letter from the Revenue,' said David. 'It wants to come and look at subcontractor status. It will finish us.'

I said that I would be straight over and that I would bring John, our status specialist, with me. We drove through heavy rain and, the umbrella having been blown inside out on the short dash from the car park, arrived soaking wet.

David sat at the far end of the table. The wind and rain battered against the window and the only light in the room seemed to come from the scrolling screen saver, which read 'the light at the end of the tunnel has been turned off to save money'. David broke the silence, 'I am told that these visits always end in big settlements. You know our financial position. We are finished'.

I reminded him that we had looked at status in some detail prior to April 1997, and said that I had no reason to think we had got it wrong. I said I would leave John there for the day to look again at each individual's position using our status checklists. By the end of the day, he had reassured David that nothing had changed. A couple of weeks later, the visit took place, with John in attendance. It was very amicable. A positive outlook returned. Then the letter arrived.

The letter

'I am of the opinion,' it began, 'that the company has incorrectly addressed the question of status. If in April 1997 it put some individuals onto the books and not others, it cannot show that it took due care and attention when addressing the issue of status.' I have rarely read such a stunning non sequitur. The letter went on to assert that labour-only workers could not by definition be self employed.

Gloom returned to Chard. The voice of Gradgrind rang out facts! John and I began to assemble the facts using the list of status indicators listed at paragraph ESM508 et seq of the Employment Status Manual. The author of the manual embraces the Gradgrind method, as paragraph ESM501 demonstrates: 'Where someone's status needs to be determined, you must first establish the facts It is only after the facts have been ascertained that an opinion can be given on the person's status'.

There is even a list of required facts at paragraph ESM525 and two forms, AF300 (Status: Fact Finder) and AF301 (Status: The Approach to Fact finding) to help the officer. Form AF301, the manual warns, 'should be used thoughtfully'. Further, there is some interesting advice on the use of 'open' and 'closed' questions at paragraph ESM 502, which is well worth reading.

The reply

We began our letter by saying that we assumed the officer was operating within the guidance at paragraph ESM5, viz. 'to ensure that the correct Schedule of charge is applied and not to impose any particular status'. We then addressed the labour-only question, pointing out that this was no bar to self-employed status as confirmed by Hall v Lorimer [1994] STC 23. Mainly, though, we concentrated on demonstrating that each individual test in the manual had been satisfied.

The reply confirmed that the concern was to 'get it right' and not to impose any particular opinion. It is always good to have that in writing. What followed was a gem.

'Of course,' the letter said, 'labour only engagements can constitute self-employment, but crucially these engagements must have intrinsic financial risk. This was the nub of Hall v Lorimer as Hall had anything up to 40 simultaneous contracts with clients who were by no means financially secure and for this reason it was contended that there was intrinsic financial risk.'

In a flippant moment, we considered replying that we had been surprised to learn that the chairman of the Board of Inland Revenue permitted his Inspectors to have 'anything up to 40 simultaneous contracts'. It had been Mr Lorimer whose tax status had been at issue. We said nothing, but were reminded of the Reverend Sydney Smith who 'never read a book before reviewing it, as it prejudiced a man so'. It is always a good idea to read a case before quoting it.

Individual factors

Turning to the individual factors, the officer questioned whether substitution or correction of faulty work actually took place; said he understood that plastering was remunerated by the square metre 'very much like piece work', noted that materials were supplied by the company, that only small tools were supplied by the men and that all other factors were neutral(!). A meeting was suggested. First, however, we wrote to say that we had carefully re-read Hall v Lorimer and thought it was wrong to say that Mr Lorimer had many simultaneous contracts with clients who were financially insecure. What was said was that 'some clients are bad payers and keep him waiting for three months before paying'; there was no suggestion that anyone had defaulted. Lord Justice Nolan said, 'the risk of bad debts and outstanding invoices is certainly not one which is normally associated with employment'. Risk was all that was needed. Most of the companies Mr Lorimer dealt with had balance sheets far more secure than that of Chard Coatings, which showed net assets of only a few thousand pounds. The financial risk was real.

Meeting

The subsequent meeting agreed a way forward of which Gradgrind would have approved. An even more detailed list of facts was to be prepared in respect of each man's activities, addressing the individual indicators of status in depth. This is where John and I learned a lot about plastering. What follows is specific to that trade, but illustrates how much useful detail there can be just waiting to be uncovered whatever the occupation or trade. We used the general construction industry guidance at paragraphs ESM4324 and 4325 and then focussed on specific areas of concern.

Provision of equipment

Although the exact equipment varied from man to man, the detailed list we went on to prepare included generators, lights, hand tools, trestles, board-lifters (mechanical devices used to lift plasterboard horizontally onto ceilings), drills, vans of various sizes, and in some cases computer equipment. In each case it amounted to several thousand pounds worth. They also supplied their own safety equipment and protective clothing. This was more than paragraph ESM1061 sought.

Correction of faulty work

We were able to identify instances where faulty work was corrected for no additional payment. In some cases, this involved a substantial amount of work. Paragraph ESM512 was satisfied.

Right of substitution

The officer said the company needed to show that the right not only existed, but that it had been exercised. We pointed out that paragraph ESM1053 only required that the right was genuine, and that paragraph ESM1058 said 'You cannot assert that a right of substitution does not exist just because a substitute has never been provided'. Notwithstanding this, we were able to demonstrate that on several occasions individual plasterers had actually provided substitutes both with and without the company's knowledge.

Provision of materials/piecework

We were able to demonstrate that it was normal practice in the industry for the company to pay for and provide plaster. Furthermore we were able to cite instances of individuals providing (within the contract price) nails, fixings, beading and other items. Paragraph ESM513 acknowledges that payment 'by the piece' can be a feature of both employment and self employment.

Other work

We were able to show in the case of each man that he had worked for other contractors. In some cases, this required the co-operation of their accountants. We were also able to show that each man had declined work at times because of other jobs. Instances were cited where men had walked off site because of other commitments (a situation the company would not tolerate in the case of an employee). Paragraphs ESM1092 and 1093 were satisfied.

We supplied around three-quarters of a page of detail in respect of each individual, referring constantly to the Revenue manual. This was absolute overkill of course, but it worked.

The result

'Having given further consideration to all the information obtained', the officer's final letter said, 'I can accept that the individuals identified in your letter have been correctly engaged as self-employed subcontractors.'

We gave him full marks, not because we won, but because the result was the application of the correct Schedule of charge. At no point were we invited to do a deal or offer a sacrificial lamb. At no point did we feel that the officer had closed his mind to the facts.

Using the Revenue's own Employment Status Manual proved incredibly effective. We would not contemplate dealing with a status enquiry without using it. The nil settlement in this case really did save the company and the sun was shining brightly the next time I visited Chard. Even Gradgrind would have permitted himself a smile.

Paul Aplin is a tax partner with A C Mole & Sons, Taunton and can be contacted on 01823 251311 or by e-mail: paulaplin@acmole.co.uk.

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