So Slurry You’re Employed

A recent Tax Tribunal case involving a self-employed service engineer of Slush Puppie Ltd, highlights that even where a contractor maybe identified as being part of the end client organisation, this is not decisive in itself.

Ross Sandford and members of his family had been directors and shareholders of a family company called Cambusnethan Confectionary Co. Ltd (CCC). CCC had a relationship with Slush Puppie Ltd (SPL) that dated back to the 1980's and held appointment as a Slush Puppie distributor for part of Scotland.

In 2001, CCC agreed to sell the distributorship business to SPL for a consideration consisting of payments over 5 years from the profits of the business so purchased. Those profits were to be paid to CCC, of which Mr Sandford was to remain a shareholder and in so doing shared an interest in the successful outworking of the sale.

Although not part of the sale agreement all CCC staff became employees of SPL with the exception of Mr Sandford. He became a self-employed service engineer which was in keeping with SPL's policy of engaging engineers of Mr Sandford's type on a self-employed basis.

Although Mr Sandford claimed that his preference was to have been taken on as an employee the Tribunal found that he was willing and did actually agree to self-employed status.

No formal contract was ever drawn up between the two parties.

Working Arrangements
Basis of payment

Mr Sandford's agreed daily rate was £120 whereas his self-employed counterparts only got £80. This higher rate reflected the terms of the sale negotiations and the fact that the area covered by Mr Sandford in Scotland was particularly extensive.

SPL's employed service technicians were paid an annual salary equivalent to an average daily rate of £67.94.

During his time as a director of CCC, Mr Sandford had enjoyed health insurance and pension benefits and so to enable him to continue receiving those benefits SPL agreed to pay him a monthly consultancy fee of £236.58 plus VAT so that he could reimburse CCC. SPL chose to dress the fee up in this way in order to conceal from other service suppliers that Mr Sandford was getting a benefit that they were not.

Out of pocket expenses were reimbursed by SPL, usually at a flat rate.

Mr Sandord's unincorporated consultancy business, Keyakin Mhor Consulting, invoiced SPL for the daily rate plus the monthly consultancy fee. There was inconsistency in the delays before such invoices were paid.

Business on own account

Keyakin Mhor was VAT registered. When completing self assessment tax returns Mr Sandford claimed for capital allowances, office furniture and equipment expenses annually of between £7,500 – £9,000; public liability insurance, accountancy fees and the cost of a bank overdraft.

Exclusivity

Although, in principle, Mr Sandford was free to carry out similar work for other customers, it was not practical for him to do so and he never did. SPL was, therefore, the business's only customer. He did undertake some minimal printing work worth around £60 a year and also helped with his wife's catering business in the evenings and at weekends.

Part and parcel of the organisation

All SPL service suppliers were provided with a uniform which usually comprised of a shirt or T-shirt carrying the SPL logo. It was particularly important for engineers to wear their uniform when visiting customers such as schools where personal ID was important to the customer.

For similar reasons, all service suppliers carried an SPL business card.

SPL provided Mr Sandford, as other service providers, with a mobile phone for work purposes and requested that this be kept switched on at all times so that contact could be made whenever necessary. By retaining ownership and control of the phone SPL sought to protect their customer base.

Initially a car, and later a van, was provided by SPL. Neither carried SPL's logo save when Mr Sandford travelled out of his area or when covering for an employee. Mr Sandford paid for fuel and insurance and, on one occasion car repairs, when he was given the van. The van was, however, serviced by SPL.

Mr Sandford's business stationery showed SPL's mobile phone number and an SPL e-mail address.

Mutuality of obligation

Self-employed engineers were provided with hand held computers to facilitate the offering of work. If the nearest service provider rejected the offer of a job it would automatically be offered to another. SPL could not oblige an engineer to take a job on although if a job was particularly urgent the engineer offered it would be told so and urged to give it priority but, if they could not do so, it would go elsewhere.

If it was possible to undertake the work, Mr Sandford accepted offers of work within his area and would only reject jobs if they were outside of his area although, on occasion, he did carry out such work on special terms if no one else could be found.

Although Mr Sandford expected SPL to offer work there was no specific obligation for them to do so.

Termination

No prescribed notice period existed and Mr Sandford was able to terminate the agreement when it suited him and did exactly that by given just a week's notice although there was nothing to suggest that he was obligated to give even that much. In contrast, SPL employees were required to give one month's notice.

Control

Supervision or control by SPL over Mr Sandford was limited to ensuring compliance with public law obligations, such as health and safety requirements. The engineer's work would only be queried in the event that an SPL customer complained. There was no day-to-day supervision.

Both service providers and employees alike were asked to report unavailability due to sickness by 9 a.m on the day in question so that alternative arrangements could be made to manage work they had been expected to carry out.

Whilst holidays were unpaid, the dates of them still had to be cleared with SPL to avoid periods when their employed area operators or service engineers in Scotland were away. If he had insisted, however, Mr Sandford could have taken his holidays when he so desired albeit running the risk of souring his relationship with his customer.

Although not strictly obliged to do so, Mr Sandford attended SPL service meetings and upon occasion provided ad hoc training to other service providers or SPL staff.

Personal service/Right of substitution

Mr Sandford was free to replace his labour with a substitute but never did take advantage of that opportunity. Provided the job was done and there were no complaints from SPL's distributor, SPL neither knew or cared who carried out the work.

Financial risk

Any faulty work reported by SPL customers had to be remedied at Mr Sandford's own cost.

Equipment

In principle, Mr Sandford used his own tools and equipment but any specific equipment required for a job that he did not possess would be provided by SPL.

The relationship between the two parties continued for five years until Mr Sandford served notice to terminate the agreement in a letter dated 29th March 2007, informing SPL that he would be finishing on 6th April. This coincided with the cessation of the 5 years during which CCC had received a share of the profits of the business it had sold to SPL. It also transpired that a company called Cambusnethan Slush Ltd had been incorporated on 2nd February 2007, with Mr Sandford as the company's secretary and director.

It was Mr Sandford's tax agents who wrote to HMRC in June 2007 suggesting that their client had really been an employee of SPL and claimed a refund of the income tax that Sandford had paid under self assessment. In response, HMRC conducted a telephone interview with Mr Sandford and issued a formal Opinion in August 2007 that he was indeed an employee.

Meetings with both SPL and Sandford ensued until in December 2008 HMRC announced that their Compliance Check had been concluded and their original Opinion was reversed. This sparked an objection by Sandford's agents and reluctantly, and also to SPL's astonishment, HMRC accepted that the matter would have to be resolved “independently.” When SPL sought an explanation as to the reason for HMRC's u-turn they were simply told that “because of confidentiality issues” the Revenue were unable to comment.  

Tribunal's finding

That neither side insisted on having a written contract was a pointer to the ad hoc nature of the relationship which was essentially flexible and pragmatic.

The circumstances of Mr Sandford's financial and organisational independence of SPL pointed strongly away from employment.

Mutuality of obligation

Beyond the day on which work was undertaken, neither party was under any obligation. A daily rate, coupled with the system for accepting or rejecting work was a strong indicator that matters were based on a daily contract.

Control and personal service

Mr Sandford was an accomplished engineer and could be trusted to ensure that jobs were carried out either by him or by another, and that he neither needed or received supervision.

Financial risk

The fact that Mr Sandford had arranged an overdraft facility with his bank reflected the risk that invoices might not be paid promptly, or at all, and the irregularity which they were paid.

Whilst no substantial risks arose during the course of 5 years this did not detract from the potential risks that existed.

When CCC sold its business to SPL there was no evidence of any non-competition clauses. Without any formal contract Sandford gambled that SPL would part company with him, leaving him to seek work elsewhere. Conversely, SPL accepted the risk of Mr Sandford setting up in competition with them, which is something that he eventually did in 2007.

Length of engagement/Intention of parties

In practice, the relationship was driven by Mr Sandfords' sharing in the profits generated by the business sold to SPL for 5 years after 2001, an interest in keeping the distribution equipment functional and his need for the income. For SPL, their motive was driven by retaining Sandford's services to keep their new distributorships running smoothly and knew that he would maintain the equipment in working order.

The pattern of the relationship between the parties remained the same for 5 years, including monthly invoicing, but this did not alter the fact that both SPL and Sandford had intended to create a self-employed relationship from the outset. Mr Sandford had not hinted anything to the contrary during that time and the Tribunal felt it was significant that the issue of status was only raised on the advice of tax agents, seeking to take advantage of an area of law reputed for its openness to interpretation, to financially benefit their client.

Integration

Attending service meetings or working in close co-operation with SPL did not demonstrate that Sandford was an integral part of SPL's business in the way that employees were.

The outward appearances of Mr Sandford's business made it appear to SPL customers as though they were dealing with SPL itself. The wearing of a uniform, being issued with SPL business cards, and displaying an SPL telephone number and e-mail address on Keyakin Mhor Consulting stationery, combined to reassure customers that Mr Sandord was 'an SPL man and that SPL vouched for him'.  This was important to SPL so as to instil customer confidence but it was not decisive of Mr Sandford's employment status.

The Tribunal judge found that for these reasons Mr Sandford was self-employed and thereby relieving SPL of Class 1 NIC's and PAYE tax of just over £32,300 (06.04.02 – 05.04.07) and £6,300 (2006/07) respectively, charged by assessments raised by HMRC. 

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