By David Kirk, MA, FCA, CTA
Make a mistake with most taxes, and you have to put your hand in your pocket and pay up. Make a mistake with PAYE, and you will find that the money has already gone – into your ‘employees’’ pockets, and you have a fat chance of getting it back.
This is why it is so important to get employment status right. Mistakes in status issues can easily bankrupt clients, especially those of the kind where their labour force costs a large part of their turnover. If they do get the self-employed status of their workforce right, it can save large sums of employer’s NI, which is now charged at 13.8%, and in some competitive situations can be the difference between business and no business. It is well known that some large companies have sales forces of people who only work for them, but claim to be self-employed – the life assurance and construction industries are particularly noted for this. Are they in fact self-employed?
I first stumbled across this subject back in 1998, when doing consultancy work for a client who was complaining that the workforce that he had, which was from a well-known ethnic minority, simply did not behave in a way that fitted in to the employment laws of this country. He was having to contort his business systems in order to accommodate the laws rather than to accommodate his workforce. The more I listened to him, the more it seemed that they were not in fact employed, but I needed to be able to back this up. The lawyers that we went to all gave us different advice, and legal textbooks were no more helpful. Some original research was required.
I found an area where at first sight the courts seem to have gone out of their way to cause confusion, but where further analysis showed a surprisingly consistent approach if one delved deep enough. This is all the more remarkable when one takes into account the various different strands of law that make up the case-book: it started with vicarious liability in the late nineteenth century; the first tax case in this field dates from 1933; we move on to pension rights in the 1960’s and unfair dismissal in the 1970’s; workmen’s compensation also comes into it from time to time; and inamongst the precedents one also finds a copyright case and a case concerning Crown privilege. There are as yet no immigration cases of sufficient importance to make it into the lexicon but that is surely only a matter of time.
By concentrating on what the higher courts have said (judges in lower courts, such as the Employment Tribunal, frequently seem to be just as confused as everyone else), it could be seen that there is one case – that of Ready-Mix Concrete (South East) Limited v Minster of Pensions and National Insurance  1 All ER 433 – which really is the fount of all modern jurisprudence in this subject. Of course it has been embellished by later judgments, but its basic principle still stands. This is that in order for there to be a contract of employment, three conditions must be fulfilled:
(i) In exchange for remuneration the employee agrees to provide his own work and skill in the performance of some service for his employer. (I have standardised the English here: the judgment actually talks of masters and servants, as one might just still have been doing in 1968.) This is known as the mutuality of obligation test. The words ‘his own work’ have led some smart lawyers to introduce rights of substitution, so that in theory someone else can do the work and there is no mutuality. The courts are rarely fooled by this.
(ii) He agrees that in performing that service he will be subject to the employer’s control in a sufficient degree to make that other an employer. This is known as the control test.
(iii) The other provisions of the contract are consistent with its being a contract of service. This test that has been greatly amplified, and myriads of other tests have been devised to help to determine the outcome. What the judge in the case was looking at was whether it was a contract ‘of service’ or a contract ‘for services’; judgments starting not long afterwards have tended to look at whether the putative employee is in business on his own account or not: if he is then this condition is not fulfilled and it is not a contract of employment.
I mentioned earlier that the courts have embellished the rationale in this case, and it is not possible in the space of 1100 words to go into any more detail. If you want to see the full picture, my book Employment Status – the Tax Rules covers 181 cases in 96,000 words. As the subject is largely one of case law it is regrettably necessary to go to this length, as one needs to be able to see not only what judges have said but why they have said it. A mechanical, tick-box approach simply will not work, despite what HMRC may think with its employment status indicator: it is a question, as one judge put it, of painting a picture, standing back from it, and ‘making an informed, considered, qualitative appreciation of the whole’.
Of course statute law does poke its head into the frame to a small extent, and the subject is very much easier to deal with when it does. Confining contracts of employment to where they are has led to people taking advantage of the situation, and governments in many of the fields of law mentioned above have added to the list of people brought into whatever-it-is that they are trying to do, people who are not strictly speaking employed. In the world of tax this means officers, agency workers and intermediaries (IR35 cases). Some professions are categorised as employed for National Insurance but not for Income Tax (and in one case vice-versa). It is an area where busy practitioners may feel that a comprehensive guide is essential.
The author is a tax practitioner specialising in employment status and PAYE and NI issues. He can be contacted on 0845 519 5041 or at email@example.com.
‘A volume that will find a useful place on the bookshelves of any practitioner who does not have the time to trawl through many thousands of case law judgments’ – Matt Boddington in Taxation.