HMRC Claims Given the Chop

Karate instructor persuaded tax tribunal he was an employee

It is unusual for HMRC to seek to argue that a taxpayer is self-employed rather than an employee but that is exactly what happened in the First Tier Tax Tribunal case of Ashton v HMRC (2016).

Background

Karate World is a martial arts instruction business which had been established by Mr Thompson as a sole trader business but eventually employing a number of people, including Remi Ashton, the appellant in this case.

In October 2003, Karate World set up a partnership with a number of the employees as partners, including Mr Ashton. From 2003 onwards partnership tax returns were filed showing Ashton as a partner from 2003 – 2011, when he left the business on 30th April 2011. As was required, Ashton also submitted his own self-assessment tax returns which showed he was a partner and paid tax and NIC on a self-employed basis.

An enquiry was opened into Ashton’s 2011 tax return because the profit share did not match the amounts declared by the partnership. Following correspondence, HMRC raised assessments for understated tax for the three years ended 5th April 2011 totalling just over £16,000. The additional tax arose in respect of overstated business expenditure for those years. Ashton appealed on the basis that he was not a partner in Karate World but rather an employee.

Evolution of the partnership

Initially, in 2003, only four people were involved in the business, ie, Thompson, Ashton and two others. Ashton was told he was to be self-employed and the term “partner” was not mentioned until another karate school was set up and two other individuals joined the business. At the time of this change in the business, Ashton was 21/22 years old and he trusted Thompson’s decision. Mr Ashton had trained with Thompson since the age of 10 and the two had competed together in World Championships, so Ashton was accustomed to following Thompson’s lead.

Partnership documentation was provided to all the partners and they were all advised as to how to fill out the form by the business’ accountant, as well as the fact that they would need to save money to pay their own taxes.

Working arrangements

Control

Mr Ashton described Thompson as having an “iron grip” over what was done by those involved in the business, including where and when they worked. Ashton could be moved to work at another school if someone was unavailable to work although he was generally required to work at a specific site. The times which Ashton worked were set down by Thompson, not only to take classes but also to be on site at specific times. Syllabus for the schools was set by Thompson and if there were any problems in class implementing the syllabus, staff had to go back to Thompson for instructions on how to proceed. Staff were provided with documentation on how to teach the classes to various levels of students, including a schedule of how the classes should be run on a minute by minute basis.

“Partner meetings” involved staff training sessions held on Monday mornings, with Thompson teaching the staff the techniques that he wanted them to teach that week and how to implement those techniques, as well as personal development and life skills that they were to teach.

Requests for holidays originally had to be submitted in January each year because cover had to be arranged between the schools and so two people could not be away at the same time. However, this became too difficult to arrange and so instead all the schools shut down for two weeks in summer and two weeks at Christmas. All staff, therefore, had to take their holidays at that time. Whilst it was possible to take a couple of days at other times, it was difficult to organise cover. At least two weeks’ notice had to be given for any requests for days off in order to organise cover.

When staff were sick, then cover would be arranged. For example, when Ashton had to have his appendix removed, Thompson organised the cover and even paid Ashton full pay for the two weeks he was incapacitated, including bonus payments.

Financial risk

Ashton was paid ‘wages’ of £1,333 each month and would receive a bonus payment based on the performance of the school where he worked. Bonuses were paid if the school met certain financial and enrolment targets each month.

Other than a partnership savings account, to which Ashton was a cosmetic signatory, he had no access to partnership bank accounts. Another partner, a Mr Davis, gave evidence that he too was signatory to the savings account but had no control over the funds in that account.

Partners were not required to inject their own capital into the business and did not receive any money when they exited the partnership.

Copies of the partnership accounts were never offered to Ashton, although he had not specifically asked to see them until problems arose with his taxes. Neither was he given a copy of the partnership agreement.

Personal service

When asked if he could send a substitute to take classes, Ashton explained that this would be difficult as he was the chief instructor and any substitute would need similar qualifications. If Ashton was ill, Thompson would arrange for another person to take over his classes.

Equipment

Together with other staff, Ashton was expected to provide his own uniforms, training shoes and weapons for particular types of martial arts. As he was an instructor, he was expected to buy high quality weapons. General equipment was provided in the schools by the business.

Ashton was also expected to provide his own car and was told this should be a BMW to ensure that the school projected an image of a successful instructor in a successful school. This image creation also included Ashton being advised to acquire other status symbols such as a Rolex.

Notice period

Before he could leave Karate World, Ashton had to give 1-2 months’ notice, to allow Thompson to get things in place with the other schools.

HMRC’s case

The arguments presented by HMRC to counter Ashton’s claim that he was an employee were both hypocritical and tenuous. If a taxpayer sought to use these same claims in trying to preserve their own self-employment, there is no doubt that HMRC would shoot them down in flames.

Ashton completed self-assessment tax returns on the basis that he was a partner and claimed expenses on a self-employed basis.  Throughout the enquiry period, no dispute as to Ashton’s status had been raised. A person taking reasonable care would have raised this issue at an earlier stage.

They submitted that the use of the word “wages” to describe the payments by Karate World could be a payroll default and should not be regarded as evidence that there was an employment relationship. In addition, the Revenue made the following points:

1. Whilst a right of control is indicative of employment, the extent of the right needs to be considered; martial arts are a disciplined form, and the school documentation could be regarded as a helpful structure.
2. Ashton was a chief instructor in the school, described as self-employed and without any right to sick pay.
3. The requirement to work particular hours should be regarded as having only marginal importance.
4. It appeared that some substitution was permitted when Ashton was away or on sick leave.
5. The provision of equipment by Karate World was not a definitive indicator of employment.
6. Paid holidays should not be regarded as a conclusive indication of employment.
7. Intention of the parties was important, not the name given to the relationship.

Tribunal’s decision

Having found that Ashton was not a partner in Karate World partnership as he was not carrying on business in common with other persons with a view to profit, the tribunal then had to consider if he was in fact an employee.

To begin with there was clear mutuality of obligations between the parties. Other factors that demonstrated that Ashton was an employee were:

1. There was substantial control over Ashton as to when he should work and how the work was to be carried out. The degree of control exerted by Karate World over the content and structure of classes went beyond that required for consistency and pointed towards employment.
2. Holiday and sick pay is inconsistent with self-employment.
3. There was no significant change in the relationship between the parties in 2003, at the point Ashton was told that he was to be self-employed rather than an employee.

Neutral factors

Surprisingly, personal service did not enter the equation. That Ashton did not organise his own cover when he was away or sick and that such cover was provided by co-instructors or advanced students, was not considered to be indicative of either employment or self-employment. The tribunal also took the same view with regard to Ashton providing his own uniforms and weapons.

It was important that the tribunal found in favour of Mr Ashton because had the decision gone the other way, individuals seeking to replicate HMRC’s arguments in a status enquiry would be unceremoniously dismissed by the Revenue on the basis that tax tribunal decisions do not set legal precedent. A case of do as I say, not as I do!