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SOME INTERESTING AND controversial points arose in Lewis (trading as MAL Scaffolding) (SpC 527), as this article will reveal. The facts and decision are summarised in Update, Taxation, 27 April 2006, page 91, so I will not repeat them in detail here.
Like many small traders, Mr Lewis used to work on building sites until he decided to take on a couple of lads. Work was plentiful and expansion followed from one year to the next until, before he knew it, he had nearly 30 subbies, a mixture of scaffolders and labourers.
Such expansion was not matched by the appropriate level of professional advice and to a large extent things were still done 'on the back of an envelope'. Mr Lewis never bothered with written self employed contracts; after all the lads had always been self employed. In fact Mr Lewis never even incorporated his sole tradership.
The visit
Then one day HMRC came to visit and on the basis of a rather superficial and blinkered fact finding exercise came to the conclusion that all 30 workers should have been taxed under PAYE. What are the chances of that happening? They looked to Mr Lewis for a huge settlement approaching a third of a million pounds which as a sole trader would have washed him, his business and probably his family home down the drain.
Mr Lewis approached me for assistance and I advised him to incorporate and to enter into robust written contracts for services with the workers. This he did, but that still left the previous years up in the air.
Despite many months of arguing and considerable expense being incurred, HMRC maintained the workers should have been on PAYE, and formal Social Security Contributions (Transfer of Functions) Act 1999, s 8 notices were raised dealing with the National Insurance side of things and Income Tax (PAYE) Regulations 2003, Regulation 80 determinations dealing with the alleged tax liability. This is where the problems started.
The Reg 80 determinations referred to 'various employees' without naming any actual names. Reg 80 makes it clear that to be valid it must either state the names of the actual workers alleged to be employees or state the 'class' of workers, e.g. 'carpenters'. They did neither. Accountax had in its possession clear written confirmation from a different regional appeals unit stating that HMRC head office advice was that such vaguely worded determinations were invalid. However, HMRC continued to argue the validity point in this case. This became one of the points of contention to be argued at a preliminary hearing which was laid down to deal with, inter alia, directions for the case management.
Timely concession
Quite literally minutes before the commencement of the preliminary hearing HMRC withdrew the validity point and accepted that the wording of the Reg 80 notices was indeed too vague to constitute a proper determination. Readers might wonder what was achieved? Surely HMRC could simply re-issue the notices using the right names? Yes they could and they did, but because this point was conceded after 5 April it meant that the earliest year 'fell out' of the normal six-year period and so could not be re-issued. This one factor alone took £100,000 out of assessment, so practitioners should be very careful when reviewing the wording of any determination.
A further preliminary technical point was raised: does a s 8 notice have to state the names of the workers? HMRC argued that so long as the putative employer was named it was not necessary under the National Insurance regulations to name the workers or give them a copy of the notice. Dr Williams, the Special Commissioner, decided that this was a fairly important point and should be left for the substantive hearing.
Dr Williams decided that he would only consider the validity of the s 8 notices should he decide that the workers were 'employed earners' and as such the usual process of witnesses, evidence and legal submissions ensued.
Victory!
Some weeks later the decision was announced and all workers were held to be self employed. As such the validity of the s 8 notices was not commented on.
The decision itself does not offer any new legal developments save one minor point in respect of the control factor. In previous disputes and litigation, HMRC have always argued that control can be delegated to a third party, e.g. a site agent. Dr Williams cast doubt on this.
He noted the clear status rules laid down in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 and found that the totality of the evidence (particularly concerning mutuality of obligations, control, substitution rights and a number of lesser factors) clearly pointed to a self employed relationship. HMRC's interpretation of mutuality was rejected but there was also a much stronger criticism of their approach.
Dr Williams suggested that in effect HMRC had handled the status enquiry in a less than objective manner. They wanted to establish an employer/employee relationship for their own purposes and then went out to justify a conclusion they sought. These words should not be underestimated:
'The [HMRC] appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers there if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking. They have totally failed to persuade me.'
HMRC consternation
The writer understands that this comment has caused some concern within HMRC, and so it should.
A further interesting point emerged during the actual hearing. Dr Williams has particular expertise in social security and National Insurance matters and he raised the point that National Insurance contributions in the context of 'employed earners' is a weekly charge. Does that not suggest that any s 8 notice should be raised on a week by week basis? If that is the case, each worker would need 52 separate notices for each year. There were 29 workers in this case who had been assessed for a six-year period. That is an awful lot of bits of paper (over 9,000 in fact). The point was raised and put to HMRC during legal submissions.
Naturally HMRC commented that only limited notices were raised for administrative ease. Dr Williams acknowledged that fact but noted that this did not mean it was necessarily right. He acknowledged that HMRC had taken over certain National Insurance functions under the Social Security Contributions (Transfer of Functions etc.) Act 1999 but this did not entitle them to interpret the National Insurance rules differently. In the event, this was also a non-issue because all the workers were found to be self employed.
It has now become our policy to state as one ground of appeal that s 8 notices need to be raised on a weekly basis and if this is not done, they are invalid. We are quite happy to test this as a preliminary point at the Special Commissioners in the future so the matter can be clarified.
Mutuality
This issue also raises an important mutuality of obligations point. HMRC try to argue that each time work is performed and paid for, mutuality has been established. This is not what mutuality means but, following that idea through, HMRC should recognise that as the workers were paid weekly and they contend that each week's work had inherent mutuality then that is all the more reason why the s 8 notices should have been issued on a weekly basis. The actual s 8 notices were global or umbrella notices which makes life much harder for HMRC, because effectively such global notices suggest that there must have been mutuality subsisting for the whole year the notice period covers. This is a very difficult position for HMRC to explain while they are at the same time trying to argue that each separate week's work and pay has the required mutuality.
No doubt these points can be aired in the future. Accountax currently has around six appeals listed at the Special Commissioners and although experience suggests that HMRC will withdraw on some of the cases shortly before the appeals are heard, there are bound to be one or two that go the full distance and provide a forum for a decision on these matters.
Ironic twist
The final twist in the case is that, in evidence it emerged that two workers had previously taken MAL Scaffolding to an employment tribunal for certain employment law rights and had won their case. So here we have a situation where there were no written contracts and previous losses at an employment tribunal and yet self employment was established.
The MAL Scaffolding decision gives a great deal of hope to small contractors who are working hard to make a living.
