A special commissioner allowed an appeal by a hotel and its worker against assessments to income tax and National Insurance contributions (NICs) raised on the basis that he was an employee of the hotel since, on the evidence, the conditions necessary for a contract of services were not fulfilled.

Facts

The appeals concerned an employment status dispute. The first taxpayer (‘PPH’) and the second taxpayer (‘M’) contended that M was an independent contractor carrying out work for PPH. The Revenue contended that M was employed by PPH. The dispute related both to NICs and income tax.

PPH was a partnership between a husband and wife who had purchased the hotel business in 1996. At the time, the husband carried out some of the maintenance work. In 1999, PPH started an expansion project, as a result of which about 35 rooms required painting and decorating. A firm was initially hired to carry out the decorating work but it had not been finished. M and P who had been employed by the firm agreed to stay on until the work was complete and quoted an estimated price for the remainder of the work. The whole job took about two months to complete.

M subsequently carried out various maintenance jobs for PPH. Initially he quoted a price for each task but was later paid a daily rate but there was no written contract. At first, M worked for a total of five days a week, but later this changed to three days, five days or nothing in a week. The maintenance jobs were listed in a maintenance book, which was checked regularly. M decided what he wanted to do, and would work through the list in the order which he decided. He had the discretion to refuse to do any of the jobs on the list. The types of work which he refused were electricians' work, plumbing and building, and generally anything outside the category of easy or routine maintenance; he did not carry out tasks for which he did not have the knowledge or expertise. There was a period when M considered that the work for PPH had dried up, during which time he did work for other clients. He was not required to work specific hours and sometimes failed to turn up at all.

Determinations under reg. 80 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) for the years 1999–00 to 2003–04 inclusive were issued on 4 April 2005 to PPH relating to the payments made to M. The taxpayers appealed and an issue arose as to the tax and National Insurance status of M in relation to his association with PPH. The taxpayers accepted that the onus of proof rested with them and the standard of proof was the balance of probabilities.

They accepted that three conditions were necessary for a contract of services, the mutuality of obligations test, the degree of control test, and that other provisions of the contract were consistent with it being a contract of services. However, they argued that, in this case, the first condition did not exist. At no time was the hotel obliged to offer M work, nor was M obliged to accept and perform it. It was not sufficient that M turned up and was paid. As regards the second condition, the wife had no control over any of the relevant factors and, in the core areas of lack of sufficient control and lack of necessary mutuality of obligations, the irreducible minimum required for a contract of services was clearly absent from the relationship between the parties. Although several factors supported the contention that M was in business, there were almost no significant factors indicating a contract of employment. The taxpayers also challenged the validity of the notice of decision since it was addressed to the hotel and not to the partners. They argued that, since the hotel was not a legal entity, it could not be assessed to tax.

The Revenue argued that as regards mutuality of obligation, the issue was whether it existed during a particular contract and there could be mutuality of obligation in separate engagements. M was offered and accepted work. The hotel paid him for the work which he did himself and that was all that was needed for the period of the contract, whether that was a single day or many months. On the second condition, the wife had sufficient control over M for the relationship between them to amount to a contract of services.

Although the mutual intention of the hotel and M was that he should be self-employed, the relationship between them pointed towards employment, so that their intentions were not significant. Taking into account a number of factors pointing towards employment, there was a contract of service rather than one for services.

Issue

Whether M was an employee of PPH.

Decision

The special commissioner (John Clark) (allowing the appeals) said that as there was no written contract between the parties, the terms of the arrangements had to be inferred from the dealings between the parties and from any other surrounding evidence. The questions of mutuality of obligation and control had to be considered first before looking at the question whether the person engaged to perform the services was doing so as a person in business on his own account and before standing back and considering the overall effect of all factors relating to the engagement. At most, the history of payments in the present case was a background factor in assessing the nature of the relationship. As indicated by Park J in Usetech Ltd v Young (HMIT) [2005] BTC 48, provision of a personal service for payment did not automatically lead to the conclusion that the relationship was a contract of employment.

There was no mutuality of obligation either extending over the whole period or in respect of separate engagements when M turned up at the hotel and performed work. The circumstances in this case were unusual, if not unique. The wife, on behalf of the hotel, had been prepared to be unusually tolerant of an arrangement that was casual in nature and was mainly caused by M's alcoholism. M in his turn had been prepared to accept an arrangement under which work was not guaranteed on any particular occasion. In those unusual circumstances, M was not obliged to carry out work for the hotel but could choose to do so and the hotel was not obliged to offer work but could choose to do so. The obligation was no greater in respect of each separate day for which M actually worked than over the whole period of the working relationship. Since mutuality of obligation was an essential element of the ‘irreducible minimum’, the relationship between the parties could not amount to a contract of services and the appeals against the notice of decision for NIC purposes and the reg. 80 determinations should be allowed.

If that conclusion was wrong, on the second, degree of control test, the evidence indicated insufficient control for the engagement between M and the hotel to constitute a contract of service. Further, a number of the terms of the relationship were inconsistent with it amounting to a contract of service. Therefore the third condition was not met and, even if the first two conditions were considered to be fulfilled, that would not be sufficient to amount to a contract (or series of contracts) of service.

In the light of comments made following the decision in Demibourne Ltd v R & C Commrs (2005) Sp C 486, there was nothing to prevent the Revenue entering into concessionary negotiated settlement arrangements such as the one proposed in a letter dated 30 March 2005, using their powers of ‘collection and management’ under the Commissioners for Revenue and Customs Act 2005. The difficulty for tribunals was that, under the current law, such matters could not be reviewed on appeal which left taxpayers with no remedy if an attempt to agree matters on a concessionary basis was unsuccessful. Changes in the law might remedy that position in the future.

In relation to the validity issue, the notice of decision was not invalidated by the omission of the partners' names. Regulation 3(b) of the Social Security Contributions (Decisions and Appeals) Regulations 1999 (SI 1999/1027) required the notice to state the name of every person in respect of whom it was made. ‘Person’ was defined in the Interpretation Act 1978, Sch. 1 as including ‘a body of persons corporate or incorporate’ and that definition was extended to subordinate legislation. A partnership was an incorporate body of persons. The husband and wife were persons; the hotel was the name of their partnership. Using the partnership name in the decision complied with reg. 3(b) and 4(1)(b) of the 1999 regulations. It would also be highly impractical to require all the partners' names to be shown in the case of a large partnership. It was sufficient to address a notice to the firm. There was no basis for distinguishing between different sizes of partnerships. It was sufficient if the notice of decision identified the partnership to which it was addressed, rather than identifying the partners in the firm.

(2007) Sp C 599.
Decision released 5 March 2007.