The importance of substitution in determining employment status was again confirmed in the recent Supreme court case, Autoclenz v Belcher.  The case arose from an employment law perspective rather than taxation, however the principles will apply across the board.

Autoclenz provide car cleaning services and the case involved a number of valeters who had been engaged as self-employed workers, although it was Autoclenz that drew up the contracts.

The contracts explicitly stated that the valeters were self-employed and provided a right of substitution.  The court found that if a genuine right of substitution exists this “negates an obligation to perform work personally and is inconsistent with employee status”.  A genuine right of substitution would therefore mean the valeters had to be self-employed.

The court found however, that it is possible for the written contract to be seen
through, in cases where the way in which the parties practice is so persuasive that they show the true obligations of the parties.

In this case, the court found that there was no right of substitution in practice;
the valeters had to do the work personally and were not in fact in business on
their own account.  They were therefore found to be employees regardless of the contract.

 At Eaves and Co, Specialist Tax Advisors, we have always advised that it is best practice to ensure that the written contracts are consistent with the actual
facts and practices.  It is now more important than ever to ensure that this advice is followed.

On 27 September 2010 a charity organisation was issued with a £400 late filing penalty in reference to its PAYE P35 for 2009/10 which was due on the 19 May 2010.

However the penalty charge was issued when the return was 5 months late and the taxpayer was not notified at any time before.

The taxpayer’s accountant requested a review of the penalty as he believed he had filed the P35 online on 16 May 2010.

The tribunal stated that it was not legally correct to state that, once an assessment or charge had been raised by HMRC, the onus is on the taxpayer to prove it is incorrect.

Consequently, it was for HMRC to prove – on the balance of probabilities – that the P35 had not been filed by 19 May 2010 and a penalty was due.

The tribunal went on to state that TMA 1970 s118 did not define reasonable excuse in a way that required exceptional circumstances and it should therefore be given its ordinary meaning.

The accountant honestly believed he had submitted the return on time.  The tribunal found him to be an honest and candid witness and counsel for HMRC were forced to agree that this might amount to reasonable excuse even though it was not exceptional.

The tribunal also stated there was no logical reason for the delay in sending out the penalty notices for four months.

The tribunal upheld the appeal against the penalty in full, adding that HMRC had ‘neither acted fairly nor in good conscience’.

 This case has a wide-ranging impact on excuses for late filing of returns.

The tribunal ruling goes directly against HMRC’s longstanding view and published guidance that reasonable excuse equates to exceptional circumstances outside the taxpayer’s control.

The tribunal’s view was that reasonable excuse should be given its ordinary meaning.

HMRC have put in place a new scheme in order to test whether emails can be used more effectively for communicating with taxpayers.

 A pilot scheme has begun covering Corporation tax, VAT and employer-compliance issues.

 There is currently no intention to make email communications compulsory, but it may enable quicker responses in some circumstances.