Lights, camera, action

    Being the object of the news story, rather than the deliverer of it, is rapidly becoming an unwelcome phenomenon for several high profile news journalists and other media celebrities.
     
    HMRC has examined a list of 469 current or former presenters who have been paid via personal service companies and selected around 100 for further investigation. Only last month it was widely reported that Joanna Gosling, David Eades and Tim Willcox are involved in a protracted status dispute with HMRC, with a full tribunal hearing likely later this year.
     
    Arguably HMRC is relying on ‘hackneyed’ arguments around the three fundamental tests of status:

    • Mutuality of obligation;

    • Control; and

    • Personal service  

    Whilst the arguments are, in the main, based on guidance from HMRC internal manuals, they are not legislatively sound. After all, an individual’s employment status rests on its own facts and on consideration of a set of criteria established in tax case law over many years.
     

    Case law

    Despite being almost 50 years old, most employment status decisions from the courts can trace themselves back to the case of Ready-Mix Concrete (South East) Ltd v Minister of Pensions and National Insurance. This posited three conditions which must be present before a contract of service (employment) can exist. 
     
    These are:
     
    i. The servant agrees that in consideration of a wage or other remuneration he will provide his
    own work and skill in the performance of some service for his master.
    ii. He agrees, expressly or impliedly, that in the performance of that service he will be subject to
    the other’s control in a sufficient degree to make that other master.
    iii. The other provisions of the contract are consistent with its being a contract of service.
     

    Mutuality of Obligation

    One of the principal arguments used by HMRC in respect of the three fundamental tests include:
     
    ‘Mutuality of Obligation has been satisfied, in its most basic form, by you having the obligation to perform services and the BBC to pay for those services throughout the period of the contract’
     
    HMRC’s view is that simply entering into a contract and being paid, is sufficient to establish mutuality. We have successfully argued before the tax tribunal that HMRC had erred in law and this was highlighted in the case which we took to Tribunal – MBF Design Services Ltd.
     

    Right of Substitution

    ‘The contract between the PSC and end client is for services of the director (of the PSC) personally.  The end client would provide cover if the director was unable to present for any reason and pay any substitute directly.  Personal service is a requirement of the engagement.’

    The contract between the PSC and end client is for services of the director (of the PSC) personally.  The end client would provide cover if the director was unable to present for any reason and pay any substitute directly.  Personal service is a requirement of the engagement.’
    As we continually remind HMRC, it is the right of substitution that is important, provided that right is not unduly fettered.  The fact that someone has not needed to instigate a substitution should not detract from the fact that a contractual right exists. 
     

    Control

    HMRC will often assert:
     
    ‘The right of control by the engager is an essential element of a contract of service.  It is the right to exert control that is significant, not whether that right is exercised.  Conversely, if there is no right of control of any kind there will not be a contract of service.’
     
    Since there will always be a degree of control by the paying party in the relationship, the test cannot, and indeed is not met simply by suggesting there is any form of control, or right thereof.  It is the extent and degree of that control which needs to be properly considered.
     
    Four kinds of control have been identified: what, where, when and how. 
     
    By far the most important of these is the ‘how’, in other words the manner in which the services are provided.  HMRC’s opinion, which is particularly pertinent in media cases where the individual’s experience and skill are key, is typically that the more highly experienced and skilled the individual, the less scope there is to exercise control.  One would expect HMRC to interpret this as a strong pointer towards self-employment but instead, it is treated as a neutral factor on the basis that if there is no scope for control, then HMRC cannot consider it as relevant.
     
    This view should clearly be challenged as HMRC cannot have their cake and eat it!
     
    There are further factors which will need to be considered as part of the overall review of status, but we have limited our comments here to the three main ‘McKenna tests’.
     
    Status disputes are both complex and time consuming and in our experience, are made more so because HMRC’s fact finding leaves a lot to be desired.  It either fails to ask the pertinent questions or if it does, it fails to follow up with further questions, answers to which would put the engagement in its correct context. 

    In our opinion this is because HMRC is seeking to achieve the outcome that it desires, rather than the correct decision.  An example of this can be seen in the case of M Lewis T/A MAL Scaffolding, MAL Scaffolding v HMRC [2006] SpC527, where Dr Williams suggested that in effect HMRC had handled the status enquiry in a less than objective manner. It wanted to establish an employer/employee relationship for its own purposes and then went out to justify a conclusion it sought.

    'The [HMRC] appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers there if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking. They have totally failed to persuade me.'

    Status disputes require persistence and attention to detail but based on our experience, and clients  we have represented, HMRC’s opinion is not final and can be successfully challenged.
     
    The comment that is often used by HMRC “each case on its own merits” is worth remembering as each case will be different.  It is, however, somewhat ironic that HMRC’s opinion letters typically rest on the same commentary almost word for word in every case!
     
    Jacqui Mann and Nigel Nordone are former HMRC Inspectors and specialise in status disputes. Their forthcoming training workshop will cover issues raised in this article and explore lines of defence. To book a place, please follow this link. Jacqui and Nigel can be contacted on j.mann@abbeytax.co.uk and n.nordone@abbeytax.co.uk