Castle Construction (Chesterfield) Limited v Her Majesty's Revenue & Customs, SPC 00723

Spc00723

Income Tax and National Insurance – whether bricklayers and other construction workers engaged by the Appellant were employees or self-employed sub-contractors – Appeal allowed as regards the majority of the workers

CASTLE CONSTRUCTION (CHESTERFIELD) LIMITED Appellant

• and –

Special Commissioner: HOWARD M NOWLAN

Sitting in public in London on 29 September - 3 October 2008

David Yates, counsel, for the Appellant

David Seaman and David Weissand, Appeals Cross Cutting Group of HMRC, for the Respondents

© CROWN COPYRIGHT 2008

Introduction

1. This has been a case on a very familiar topic, namely the issue of whether various workers are properly classed as employees or self-employed sub-contractors. It is also a case where my decision should be relatively straightforward since there are countless authorities on the subject. In the course of the hearing many of these authorities were drawn to my attention and I have read them all. Notwithstanding this, I have found it extremely difficult to reach my decision. In the event, my decision is that with the exception of 7 workers, all the remaining workers, that is 314 out of the total of 321, were rightly classed by the Appellant as self-employed sub-contractors.

2. The Appellant’s trade is to undertake building work, generally on construction projects where another company (often one of the household name building companies) is the main contractor. The Appellant’s trade was until recently confined to undertaking sub-contracted bricklaying services. It has recently sought to expand and also to provide scaffolding services, and to a lesser extent, carpentry and joinery services. Its workload varies very considerably according to the health of the building sector. On one occasion the Appellant was providing bricklaying services on 17 sites. At the date of the hearing that number was down, not surprisingly, to 5 projects.

3. In common with many other building companies, the Appellant has always hired its workers on a sub-contract basis, and its only employees have been its permanent head office staff, quantity surveyors and “trainee” bricklayers and “novices” in the first two years following training. Hiring workers on a sub-contract basis in all other cases, under which workers could be hired and terminated with absolute flexibility, has suited the company and its ever-fluctuating workload. It has suited virtually all of the workers who also relish the flexibility to come and go, much as they please, and to work for different contractors when that seems more attractive. The disparity in time worked by a random sample of the 321 workers whose status is in dispute in this case is not a theoretical matter with little reflection in reality. There is considerable evidence of workers commencing and ceasing engagements with regularity. On a different level there is a great disparity in time worked in each week by the people being engaged at any one time.

4. One of the unchallenged statistics given by Mr. Botham, the director in charge of the Appellant’s day-to-day business, was that in one year the Appellant had engaged 450 individual bricklayers at times during the year, but would have only required 150 to do the same work, had the 150 operated as full-time employees, each working an ordinary full week.

5. All the workers in the present case were paid only for hours worked; they were not paid if rain or frost prevented them from working; they were not paid if they took time off for holidays, illness or indeed for any reason whatsoever. For these various reasons, and because employee and employer National Insurance Contributions (NICs) did not have to be deducted and paid in respect of sub-contractors, the hourly-rate paid to the workers was considerably higher than the rate that would have been paid, had the workers been full-time employees doing the same work. This is because the extra pay had to compensate for these various disadvantages, and for the loss of state sick pay, and redundancy benefits and the absence of any State Earnings Related (SERPS) pension benefits, all of which resulted from the NIC implications of the sub-contractor status.

6. It is the Respondents who suggest that the workers must properly be analysed to be employees. When this was suggested and the Appellant notified its workers that pragmatically they would have to enter into employment contracts, it is said that many walked out in protest. As a result the Appellant decided that with a few exceptions it would continue the sub-contract arrangements, and challenge the Respondents’ claims and assessments by bringing this appeal.

7. In the present case the Appellant company has invariably paid the workers that it has engaged under deduction of 18 or 20% tax under the Construction Industry Scheme (“the CIS scheme”) so that virtually no liability to income tax has been affected by the “status” issue or by my conclusion that almost all of the workers were indeed rightly treated as self-employed. This case is thus essentially about the fact that Class 2 and possible Class 4 National Insurance Contributions (“NICs”) payable by the self-employed, are lower than Class 1 primary and secondary contributions payable in respect of employees.

8. In 2002 HMRC officers had considered the status of the Appellant’s workers and confirmed that they were rightly being treated as self-employed. In November 2005, HMRC notified the Appellant that it was considering a further review and intimated in June 2006 that it now believed that it was likely that it would assert that all the workers should have been ranked as employees. At this point, HMRC were unaware of their earlier review and had lost the letters that had confirmed that self-employed status was correct. In view of this, when HMRC gave their official Determination that the workers were now (apparently, according to the Appellant, on no different facts) to be classed as employees, assessments were only made for the year 2006/7, rather than any earlier years, in recognition of the earlier confirmation given to the Appellant that HMRC had forgotten about.

9. It is worth noting that if HMRC’s assessment of additional NICs was now to be sustained, the Appellant would face a bill for approximately £0.5 million, though to the extent that this figure included an amount in respect of PAYE income tax, it was said that this would in practice be reduced very significantly on account of a credit for the income tax already accounted for under the CIS machinery. This tax claim is calculated by reference to the payments made to people assumed to have been sub-contractors, so that the hourly rate was considerably higher than it would have been had the workers been classed as employees. I will refer in due course to one aspect of this that seems to me to be highly relevant to the merits of the case. One fact that has, and must have, no relevance to my decision, is that if the appeal was dismissed and the assessments sustained, I do not doubt for an...