Mr Sandford was a service engineer for Slush Puppie Limited (SPL). From 2001 to March 2007 the individual had always considered himself to be self-employed and paid tax on that basis.
However; when his engagement ceased, the individual’s tax agents reviewed the situation and concluded that they believed he had been an employee of the company.
As a result they informed HMRC and sought a refund of self-assessment tax paid, suggesting SPL should be liable.
After a review of the facts HMRC accepted this view. They subsequently issued SPL with a notice that ruled Mr Sandford was an ‘employed earner’ and as result SPL were liable for income tax and Class 1 NICs.
The tribunal looked at several of the key indicators and found on balance Mr Sandford was self-employed.
Below are some of the key points which the tribunal felt indicated self-employment:
He was free to take on business from elsewhere and was able, having accepted a job, to find someone else to do it.
SPL’s supervision and control of his work was restricted to ensuring he complied with legal obligations
The use of a daily rate of pay was ‘a strong indicator’ that matters were based on a daily contract. The fact that monthly invoices were raised for convenience did not alter this fact.
The lack of redundancy rights or other employment protection meant Mr Sandford shouldered financial risk.
The fact ‘that no substantial risks materialised in the course of five years is no indication that they did not exist potentially’.
The case does, however, highlight the importance of taking advice in this area as the company could have been liable for the tax due through PAYE should the tribunal have found that he was employed.
A recent First-tier Tribunal case was unusual in that HMRC were arguing for self-employment, whereas they would normally take cases to Tribunal arguing against self-employment, due to the extra National Insurance costs and less relief for expenses.
Mr Coffey had been in partnership with his wife as a builder, but had retired through poor health. He claimed that he had been employed by Dr Selvarajan to supervise the refurbishment of the Doctor’s clinic.
Mr Coffey was paid a set weekly amount, regardless of hours worked. There was no written contract, no invoices were raised and there was no right of substitution.
The tribunal found that Mr Coffey had control over the building project. In the absence of a written contract, two documents were considered. The first was a document which Mr Coffey had signed which referred to him as, “principal contractor” and “planning supervisor”. The second was a note in his diary setting out the payments to contractors, which was held as evidence that Mr Coffey was in charge of these payments. Dr Selvarajan was still responsible for actually making these payments.
The tribunal also noted that there was a lack of financial risk, but that this was not “necessarily determinative”.
The Tribunal determined that Mr Coffey was self-employed, with one key indicator apparently being the fact that Mr Coffey had previously been a builder for a number of years and that he had not checked with his accountant how his new engagement would be taxable.
Whilst the outcome of this case, and the approach taken by HMRC, might be surprising, there may be some elements that could be used to build a case in favour of self-employment.
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.