01 Mar 2012

HMRC win employment status dispute! Eric Newman Developments

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Can anyone else spot a pattern?

Weight Watchers, December 2011: Employment relationship

Philip John Wright, January 2012: Employment relationship

Barney v HMRC, January 2012:      Employment relationship

And now, Eric Newman Developments in February 2012: Employment relationship

The last four cases to go before the tax tribunals concerning employment status have all concluded that the relationship was one of employment and given that HMRC are actively increasing the number of enquiries they are opening, the stakes have never been higher.

Eric Newman Developments was the latest victim in HMRC’s crackdown on self-employment and although the liability was only £15k (excluding interest and penalties), this only related to one subcontractor earning just £15k a year, highlighting precisely how costly it can be for a business to get status wrong.

It would be reasonable to question how well the case was argued on behalf of the appellant given that a considerable number of key judgments were not used, judgements which could have dramatically altered the approach taken by the tribunal. Nonetheless, the judgment will be used by HMRC going forward and provides them with plenty of ammunition to make it harder to argue self-employment.

Control, mutuality of obligation (whether there is an obligation to offer and accept work) and the intention of the parties were cast aside and deemed neutral factors. The tribunal did not believe there was a right of substitution and followed the approach seen in Hall v Lorimer of standing back and looking at the overall picture.

A few lessons in what not to do!

  • The appellant relied on contracts for services to add weight to his argument. The problem with this however was that the contracts were poorly drafted and would most likely have put him in a worse position if they were given any weight.
  • Not only were the contracts badly written but they were clearly back-dated (the subcontractor didn’t move into the address on the contract until some three years after the date on the contract)!
  • To give the taxpayer even less credibility Mr Newman and the subcontractor both separately met with HMRC and confirmed that substitution was not possible (which was duly noted in HMRC’s notes of meeting) despite this they gave witness evidence that substitutes were allowed.
  • If this was not bad enough the final straw was when the appellant argued that the subcontractor was paid on ‘price work’ when in fact he was paid a consistent fixed amount of £328 for each week worked.

What is the moral of the story? If you are going to use subcontractors, make sure you know exactly what you are doing, don’t rely on badly drafted and inaccurate contracts and above all don’t lie to HMRC or the tribunals as they will usually be able to dig deep enough to uncover the truth. Alternatively just contract with Marble so that you don’t have to worry about an employment status challenge in the first place.