BRABYN THE TAXMAN
Tony
Thorne notes that practitioners and the Inland Revenue are increasingly disputing
the status of those who are self-employed.
We are now
entering a new era where accountants and their clients are increasingly arguing
with the Inland Revenue over the status of individuals (and also their
employers where personal service companies are involved).
This problem
gained prominence with the publication of IR35 (Countering Avoidance in the
Provision of Personal Services), the booklet produced as a result of the Government’s
perception that tax and national insurance (NI) was being lost to the Revenue.
However, this
overlooked the fact that while there were many NI losses, there were a
significant number of instances which resulted in considerable gains through VAT.
Many affected contractors also work for exempt or partially exempt businesses,
resulting in the Government being net beneficiaries.
At the time of
writing, the position concerning status is based on case law and it is
interesting to note that the Inland Revenue has not won a “status” case in the
courts since 1983. However, it would appear that it is successfully denying
self-employed status by exploiting the lack of knowledge of both taxpayers and
their advisers.
When assessing an
individual’s status, a Revenue officer has a check list of some 70 plus
questions to ask before a determination can be made, yet in some cases it has
been recorded that they have asked only a few selected questions to ensure they
get the result they want.
There is a recent
case law precedent which provides guidance on the definition of employment
(Express and Echo Publications Ltd vs. Tanton), in which it was stated that for
a contract of employment to exist there must be an obligation on behalf of the
employee to provide the services personally. Where a contract allows services
to be carried out by anyone else then it must be a contract for services.
Another key issue
is whether a contract exists, and what happens if a contract is in verbal
format only? A verbal contract can be used to determine self-employment, but is
not recommended because its terms cannot be evidenced.
This was the key
consideration in the case of Barnett vs. Brabyn, which has been summarised
below as a clear example of why such contracts should be avoided.
As mentioned
above, case law is on the side of the self-employed and the following points
may be used as guidance towards confirming self-employment:
The workings
noted in IR35 are enacted in the Welfare Reform and Pension Act 1999, where the
regulations make reference to the individual - “the worker” - having to perform
the services personally, or be under an obligation to perform the services
personally, and it follows that these earnings fall into the PAYE regulations.
Broadly, these
earnings would be liable to tax and national insurance, subject to a 5%
expenses allowance. It would therefore appear that where the obligation does
not specify that the contract is to be performed by a specific individual and
there is a right to send a substitute, then it will not be governed by these
rules.
It is hoped that
this article will clarify the situation and help you and your client(s) to
defeat any attempts by Inland Revenue staff to take actions which ignore the
correct interpretation of the law.
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Case Summary - Barnett vs. Brabyn (Inspector of Taxes) Chancery Division 22 May 1996 LTV, a partnership of Mr Barnett Snr and another, employed Mr Barnett Snr’s son, under a verbal contract and working for them only. The original intention was that Mr Barnett Jnr wanted to be self-employed as a technician to be free to exploit alternative interests. The parties agreed that Mr Barnett Jnr would receive regular payments, nominate his own hours of work, hours worked, absences and be responsible for his own tax and National Insurance. An account was opened in the partnership’s books in Mr Barnett Jnr’s name and to which payments made on his behalf for Class 2 NI and Income Tax were debited. The partnership notified the Revenue that Mr Barnett Jnr was self-employed and income tax was not deducted at source from payments made to Mr Barnett Jnr. For three years Mr Barnett Jnr was assessed under Schedule D and appeals against these assessments were determined under S54 TMA 1970, and the tax was paid. Additional assessments were raised on payments when it was discovered additional amounts had been made by the partnership and were not shown in the accounts submitted on the basis that there was additional Schedule D Case 1 income. Mr Barnett Jnr appealed against these assessments on the basis that even though the intention of the parties was self-employment, his relationship with the partnership was inconsistent with that of a sole trader. The General Commissioners upheld the assessments on the grounds that Mr Barnett was self-employed. Mr Barnett Jnr appealed against the General Commissioners decision. Points of note in the appeal hearing:
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Tony Thorne FCCA, Vice-Chairman - Practice Society
http://www.acca.co.uk/publications/inpractice/47/22626
1996 Brabyn v Barnett - High Court - this interesting
case concerned a worker whom the Inland Revenue argued was self-employed when
the worker himself wanted to be treated as an employee. The Inland Revenue
identified three overwhelming factors in favour of self-employment being the
original intention to have a self-employed relationship, the fact that the
worker had an element of flexibility as to the hours he worked and the
"cogent factor" that the Inland Revenue had determined his tax
assessments in previous years on a self-employed basis. Mr. Justice Lightman in
the High Court agreed with the Inland Revenue and it is a very helpful case.
http://www.ascotdrummond.co.uk/resources/library/ir35_h.asp?ActiveFolder=1
Prepared by Bob Dalrymple, PO Box 122, Dapto, NSW Australia 2350
eMail: bob@relativelyyours.com