Littlewood v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 29 January 2009 |
| Date | 29 January 2009 |
| Court | Special Commissioners (UK) |
special commissioners decision
John Clark
Dave Smith, Chartered Tax Adviser, Accountax Consulting Ltd, for the Appellants
David Seaman, Local Compliance Appeals Unit (Leeds), HM Revenue and Customs, for the Respondents
Income tax - PAYE determinations - National Insurance - status decisions - whether workers employees or sub-contractors - the latter
A special commissioner allowed appeals by a partnership and one of its workers against a determination of HMRC relating to the employment status of the workers. The commissioner decided that, although there was mutuality of obligation in the separate contracts, the partnership did not exercise a sufficient degree of control over the workers to make itself master, and the workers were in business on their own account, albeit in a modest way.
The first and second taxpayers traded in partnership installing windows, doors and curtain walling for commercial buildings. The partnership ceased trading in 2006. The partnership had traded from the partners' home address. In 2005, HMRC had opened a review of the partnership's operation of the Construction Industry Scheme (CIS) and the status of its workers after which HMRC decided that the status of workers was that of employees.
In January 2008, HMRC made formal determinations under SI 2003/2682 regulation 80reg. 80 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) for the years 2001-02 to 2005-06. On the same date, notices of decision under Social Security Contributions (Transfer of Functions, etc) Act 1999 section 8s. 8 of the Social Security Contributions (Transfer of Functions, etc.) Act 1999 were issued in respect of a number of workers who had been engaged by the partnership during those years.
The taxpayers appealed contending that the individuals who worked for their firm were independent contractors and not employees. The third taxpayer, one of the workers, also appealed against the decision that he was an employed earner in respect of such work. The majority of the workers were paid on "price work", but a daily rate was paid to those dealing with 'snagging'. Payments to the workers were made on the basis of a rate for a day's work. Those payments continued while the contract was running. No payment was made for a day or part of a day when a worker was not on site; that also applied when the reason for absence was a training course. Once the job was completed, the costings were worked out. The typical amount to be shared on any one job would be between £500 and £1,000, but it was sometimes bigger. There was no notice period required by either party; the workers came and left as they pleased.
Whether the workers were employed or were self-employed sub-contractors.
The special commissioner (John Clark) (allowing the appeals) said that, in the present case, an irreducible minimum of obligation clearly existed; the workers agreed to provide their work and the partnership agreed to pay for that work. That did not necessarily mean that the contract was one of employment. A broad view had to be taken of the conditions of engagement and it was not a mechanical process.
An obligation on the employer to provide work or in the absence of available work to pay was not a precondition for the contract being one of employment, but its presence in some form (such as an obligation to use reasonable endeavours to provide work, to allocate work fairly, or not to remove the ability to work, e.g. by removing the pupil to be taught) was a touchstone or a feature one would expect to find in an employment contract and whose absence would call into question the existence of such a relationship.
The question of mutuality of obligation posed no difficulties during the period when the individual was actually working. For the period of such employment, a contract clearly existed. For that duration, the individual clearly undertook to work and the employer in turn undertook to pay for the work done. That was so, even if the contract was terminable on either side at will. Unless and until the power to terminate was exercised, those mutual obligations (to work on the one hand and to be paid on the other) would continue to exist and would provide the fundamental mutual obligations.
The issue whether the employed person was required to accept work if offered, or whether the employer was obliged to offer work as available was irrelevant to the question whether a contract existed at all during the period when the work was actually being performed. The only question then was whether there was sufficient control to give rise to a conclusion that the contractual relationship which did exist was one of a contract of service or not.
It was not necessary in relation to an individual engagement to show that there was an obligation to provide work and an obligation to perform it. There was mutuality of obligation in each of the individual assignments undertaken by each of the workers. The worker agreed to carry out the work, and the partnership agreed to pay the worker for that work. The possibility of termination without notice did not affect the question whether there was mutuality of obligations. That was the case whether the termination was made by the person engaging the worker, or by the worker.
The next condition to consider was that of control. What was required for the control test could be satisfied by the retention of a right of control, although control over merely incidental matters was not likely to suffice. Taking into account the evidence from the taxpayers and the various workers, the workers acted independently of the partners and agreed matters within their teams, membership of which was not chosen by the partnership. In relation to movement of workers between sites, the evidence of several workers was that they could not be made to move from one site to another if they did not want to. The preparation of time sheets was a neutral factor in relation to control, as was the provision of training. Overall, the taxpayers did not exercise control over the workers.
Mutuality and control both had to be established before it was appropriate to move on to other tests to examine the nature of a contract; in the absence of either of those elements, the contract could not be seen as one of service and so other tests became irrelevant. On the basis of the finding that there was insufficient control over the workers, the contracts were not contracts of service. Accordingly, the taxpayers' appeal against the notices and determinations would be allowed. The workers were in business on their own account, albeit in a modest way.
1. These two appeals relate to an employment status dispute. The first Appellants, Mr and Mrs Littlewood, maintain that the individuals who worked for their firm were independent contractors and not employees. Mr Molloy, who was one of those workers, has appealed against the decision that he was an employed earner in respect of such work. The dispute concerns both income tax and National Insurance Contributions. For convenience, I refer to Mr and Mrs Littlewood's firm as "JL Windows".
2. The evidence consisted of two bundles of documents, the second, entitled "Additional Documents", mainly containing various documents supplied by the Appellants described as "not previously provided and not agreed". However, in the course of the hearing reference was made to these documents by both parties without any suggestion of objection to them. In addition, witness statements were provided by Mr Littlewood, Richard Lindley, Gary Greenwood, Ian Gilligan, Jamie Hoult and Mr Molloy on behalf of the Appellants, and by Sheena Howe and John Fakes on behalf of the Respondents ("HMRC"). All the witnesses also gave oral evidence. The parties provided a statement of facts not in dispute; this is set out below. I then set out my remaining findings of fact, except for disputed matters, which I consider later.
3. Subject to minor editorial corrections, the statement of facts not in dispute was as follows:
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(2) Mr J and Mrs C Littlewood traded in partnership as JL Windows and Doors.
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(3) The trade of the Partnership consisted mainly of installing windows, doors and curtain walling for commercial buildings.
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(4) The Partnership ceased trading on 13 March 2006.
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(5) The Partnership traded from [details omitted], which is the partners' home address.
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(6) HMRC opened a review of the Partnership's operation of the Construction Industry Scheme and the status of its workers by a letter dated 26 September 2005.
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(7) A meeting was held between HMRC officers and the partners on 19 October 2005.
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(8) A number of the Partnership's workers were approached and meetings were held with three of them.
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(9) Opinions as to the status of the workers were issued on 13 July 2006 to the Partnership and to those workers who had been interviewed.
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(10) The opinion issued was that the status of workers was that of employees.
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(11) Accountax Consulting Ltd were engaged to act for the Partnership on 21 September 2006 and on 28 September 2006 requested that formal determinations be made.
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(12) Further discussion of the issues took place between Accountax and HMRC between 4 December 2006 and 27 November 2007.
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(13) On 22 January 2008 HMRC made formal determinations under SI 2003/2682 regulation 80Regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) for the years 2001-02, 2002-03, 2003-04, 2004-05 and 2005-06.
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(14) On the same date Notices of Decision under Social Security Contributions (Transfer of Functions, etc) Act 1999 section 8Section 8 of the Social Security (Transfer of Functions) Act 1999 were issued in respect of a number of workers who had been engaged by the Partnership during these years.
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(15) On 18 February 2008 formal...
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