Last reviewed 27 June 2019
In their latest version of their statutory guidance, the Traffic Commissioners added a new section on driver employment status (document 5 — Legal entities) which highlights their concern over the issue of employment and self-employment in the transport industry. This article by tax expert Mark Cawthron provides an update ahead of the introduction of the new off-payroll rules for workers in the private sector with effect from 6 April 2020. In doing so, he looks at the related question of employment status, where legislative change is also anticipated. This will be of interest to PSV operators who regularly use the services of such individuals in the course of their business, such as those employed by personal service companies, and any HGV operators who have to deal with the issue of employment status in their business. At the foot of this article is a summary of a case where the Tribunal considered a pool of drivers to be engaged to work essentially as “day labourers”.
The new off-payroll working rules in the private sector will arrive soon enough — on 6 April 2020. A Consultation (Off-payroll working rules from April 2020) on the proposed operation of these new rules has just closed, at the end of May 2019.
In an ideal world, before April 2020 there would, separately, be clarity as to how the Government is addressing the issue of “employment status” generally — by way of new statutory test and, assuming so, the detailed (proposed) form of such test. This has of course itself been the subject of an earlier Consultation (Employment status), in 2018.
This article provides, first, a short list of the key proposals in the Off-payroll Consultation. Its main focus, however, is on this sometimes difficult question of “employment status”. Here — while we await further Government decision in this area — the article goes back over certain of the HMRC guidance materials, suggesting some of them are more helpful than others. It then considers the latest IR35 Tribunal cases: these are potentially relevant to determination of “employment status” in all situations, not just for IR35 purposes.
Consultation — Off-payroll working rules from April 2020
By “new” off-payroll working rules, we mean the rules which impose responsibility for policing the IR35 regime — where workers are engaged through certain intermediaries, normally their personal service company (PSC) — on the client, in place of the PSC. These took effect for the public sector from 6 April 2017.
November 2018 Budget confirmed the new rules would be extended to the private sector. Having made that decision in principle, Government promised to consult on their proposed operation. The key proposals in the just closed Consultation were:
The smallest organisations will not have to determine status. For companies, “small” means meeting at least two out of three of: annual turnover not more than £10.2 million; balance sheet total not more than £5.1 million; not more than 50 employees (averaged over the year). One assumes Government will need to consider how the use of off-payroll and agency workers might dovetail in with this “50 employees” test.
Status determination by the client must be cascaded to all parties in the labour supply chain; probably by clients providing the determination (and, on request, reasons for it) to the off-payroll worker directly, as well as to the party they contract with. The consultation also floats the idea of a process (based on requirements set out in the legislation) to resolve “status disagreements”. There must be the fear such a process would run up excessive costs.
Liability for unpaid tax should initially rest with the party that has failed to fulfil its obligations. In straightforward cases, where client engages the worker’s PSC directly, this party can only be the client. But in a longer supply chain, if HMRC are unable to collect the outstanding liability, it’s proposed that liability should transfer down the chain (as each party fulfils their information obligations); but then also potentially pass back up the chain (where information obligations have been met, but there is default in payment), including seeking payment from the (end) client.
The fee payer will be treated as the employer for the purposes of income tax, NICs and Apprenticeship levy, but not required to make deductions for Student Loans.
As with the public sector regime, the statutory 5% deduction from fees, in calculating the taxable amount, will no longer be granted, in relation to engagements with medium and large-sized clients.
Where the conditions in the off-payroll working rules apply, these rules will take precedence over the Managed Service Companies and Construction Industry Scheme legislation.
HMRC materials as an aid in determining employment status?
In the current version of HMRC’s Employment Status Manual, at ESM0515, HMRC say that “although there is no exhaustive list, the factors to be considered [in determining whether there is a contract of employment] include the following:
Basis of payment
Mutuality of obligation
Holiday, sick pay and pension rights
Part and parcel of the organisation
Right to terminate a contract
Opportunity to profit from sound management
Length of engagement
Intention of the parties”.
This list is well-known. Arguably though, HMRC’s approach in factsheet ES/FS1 (Employed or self-employed for tax and National Insurance contributions) is rather more informative and user-friendly. This factsheet might be regarded as “historic” although there is still reference to it at ESM 0104. It states that an individual would likely be treated as employed “if he or she answers ‘yes’ to most of the following questions”:
Do you have to do the work yourself?
Can someone tell you where to work, when to work, how to work or what to do?
Can someone move you from task to task?
Do you have to work a set number of hours?
Are you paid a regular wage or salary?
Can you get overtime pay or bonus payments?
Are you responsible for managing anyone else engaged by the person or company that you are working for?
ES/FS1 continues that, conversely, an individual would likely be treated as self-employed “if he or she answers ‘yes’ to one or more of the following questions”:
Can you hire someone to do the work, or take on helpers at your own expense?
Can you decide where to provide the services of the job, when to work, how to work and what to do?
Can you make a loss as well as a profit?
Do you agree to do a job for a fixed price regardless of how long the job may take?
However, it goes on, “if you can’t answer ‘yes’ to any of the above questions, you are still likely to be self-employed if you can answer ‘yes’ to most of the following questions”:
Do you risk your own money?
Do you provide the main items of equipment (not the tools that many employees provide for themselves) needed to do the job?
Do you regularly work for a number of different people and require business set up in order to do so?
Do you have to correct unsatisfactory work in your own time and at your own expense?
(The factsheet also warns that special rules apply to “certain occupations and jobs”).
These sets of questions in ES/FS1 probably largely derive from a combination of the two leading cases, Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (1968) 2 QB 497, and Market Investigations Ltd v The Minister of Social Security (1969) 2 QB 173. The questions are, it is suggested, a pretty good list of questions with which to work, in assessing “employment status”. Rather than being shoehorned therefore into the relative rigidity of HMRC’s online Check Employment Status for Tax (CEST) tool, better to make a considered evaluation against these questions (and then possibly turn to CEST for a “second opinion”).
Having said that, two quite interesting points are:
There have been some small but subtle changes to these questions over time. One example is that the current question above, “Can someone tell you … when, how, or what?”, used to be phrased (in the predecessor IR56 publication) “Can someone tell you at any time [emphasis added] what to do or when and how to do it?”.
More relevantly, the decisions in the various IR35 Tribunal cases in 2018 and 2019, arguably suggest the approach in factsheet ES/FS1 may be too skewed towards producing a conclusion of “employment”.
A subsequent case often cited is Hall v Lorimer (1993) BTC 473, where a professional vision mixer worked for 22 television companies in his first 14 months in business and had 580 separate engagements over 800 days in four years. In finding this was “self-employment”, a significant feature was the number of engagers and the fact that the majority of assignments lasted only a single day. Although it has its own distinct set of facts and, on the face of it, may not provide real assistance in many cases, the case remains important.
Hall v Lorimer also emphasised that it is not appropriate to adopt a mechanistic or “check list” approach; different factors will have different significance and weight in each case. A well-known quote from the judgment is: “having considered all the relevant factors, it is necessary to stand back from the detail and make a qualitative assessment of the facts as found”.
One further angle is worth mentioning in this context of “standing back and making qualitative assessment”. It is well understood that it is the true nature of the arrangements that must be ascertained, and this goes to the parties’ actions and intentions as well as to express terms included in the contract itself. This might be especially important in relation to “rights of substitution”.
Latest IR35 cases
The most recent decisions of the First-tier Tax Tribunal, on IR35, are Albatel Limited (2019) TC 07045 and Atholl House Productions Limited (2019) TC 07088, in both of which the taxpayers were successful. These follow on previous taxpayer victories in 2018, in MDCM Limited (2018) TC 06444 and Jensal Software Limited (2018) TC 06501, while HMRC succeeded in Christa Ackroyd Media Limited (2018) TC 06334.
In finding, in both Albatel and Atholl House, that the contract in question, had it been made directly between client and worker (rather than between client and intermediary PSC), would not have been an employment, features to which the Tribunals seem to have attached weight include:
The minimal supervision of the individuals’ presentation of the TV programmes in question (both individuals were well-known TV presenters).
That both individuals spent quite significant parts of their time working with or for other organisations, or on other engagements. On the facts, this went to the extent to which they were under the “control” of their immediate engager (ITV/BBC), and whether they could be said to be “part and parcel” of the respective ITV/BBC businesses. It also went to the sense of being “in business on their own account”.
What do we derive from these Tribunal decisions?
Aspects that seem to have emerged from these several decisions above, and which are of general relevance, are:
In applying the important “control” test, the Tribunals in general seem to be focusing more on “day-to-day control” of the worker, rather than on the “right to control” or “ultimate control” (Christa Ackroyd Media Limited (2018) TC 06334, with its emphasis on “ultimate control” (and where HMRC were successful), is the exception here). Perhaps too, the Tribunals’ focus has been on the “how” and “what”, rather than the “where” and “when”.
Individuals undertaking work for a number of businesses (who, if you like, have a “portfolio” of clients) might be able to argue their case more strongly. Although true that each engagement does need to be considered on its own terms (and that self-employment can sit comfortably alongside one or more (part-time) employments), the Tribunals in Albatel and Atholl House seem to have taken the view that an individual’s other work, and their commitments in respect of such other work, can impact the analysis of the specific engagement under consideration.
If the Tribunal finds strong pointers in both directions (for example, on the one hand personal service and no financial risk; on the other, insufficient control), the decision may come down to consideration of whether other features of the arrangements are consistent or not with an “employment”. And here, the cards perhaps play better for the taxpayer, because the terms of engagement between client and PSC do not contain the sorts of ancillary elements (holidays, sick pay, pension contributions) that are found in actual employment contracts. As the Tribunal said in MDCM Limited (2018) TC 06444 (a case concerning night shift management on a construction site): “However, we find that the nature of the payment arrangements, a flat rate per day with no notice period and no entitlement to any employee benefits [such as pension contributions, sick pay, holiday pay] are inconsistent with employment. Further, Mr Daniels was not treated as an employee.”
Tribunal case — haulage drivers as “day labourers”?
Finally, though, on Tribunal cases, we might usefully include a contrary decision (which dates from 2017). This is RS Dhillon and GP Dhillon (2017) TC 05883. A haulage business had a pool of potential drivers of its lorries to make deliveries. The driver to whom a delivery job was offered could refuse in which case another driver from the pool would be contacted. Drivers could stop accepting work (ie remove themselves from the pool) with no notice period. Drivers could work for other businesses if they wished. The driver who accepted a delivery job could procure another driver, provided the second driver had been approved by the end customer to do the job. In that case, the first driver received the usual fixed fee, and it was a matter for agreement between first and second driver as to what the former paid the latter.
The Tribunal considered the drivers were essentially “day labourers” engaged on terms that were unwritten, uncomplicated and non-negotiable. Although these engagements were short-term, looking at the whole picture “master and servant” (while a somewhat outdated phrase) was an apt description of the relationship between the appellant and its drivers. The appellant was very much “the boss” in the relationship; and this, combined with the near-total absence of evidence that the drivers were running their own businesses, lead the Tribunal to conclude that the drivers were employees of the appellant. The appeal against PAYE determinations was dismissed.
Looking at this Dhillon transport case, against the Albatel and Atholl House decisions, might encourage the view that an individual exercising a professional skill, not so easily “supervised”, may more readily be in a position to claim to fall on the “self-employed” side of the line. But in truth, the most important lesson from these several decisions, in considering the question of “employment status”, is that one really does just have to look at all the facts and circumstances of the particular case, and make an evaluation of them “in the round”.
A good number of IR35 Tribunal cases have come through in the last 12 months. Although they revolve around certain aspects of IR35 legislation and how the “hypothetical contract” is to be analysed, they remain instructive too in determining employment status on the direct engagement of workers.
These IR35 cases have not been going HMRC’s way. A decision of the Upper Tribunal in their favour might assist, but as things stand, it seems HMRC may well need Government to legislate changes to the “employment status” test if they are to get to where they want to be.
Mark Cawthron, LLB, CTA is a tax writer with Croner-i.