HMRC challenges taxpayer’s employment claim

Bucking the employment trend

At a time when HMRC frequently challenges claims by individuals that work they do for their clients is on a self-employed basis, the case of Phillips v HMRC 2021 (P v HMRC) bucks this trend. HMRC had formally determined P’s employment status as a freelancer for work he did for City & General Direct (C&G) between 2010 and 2013 and not as an employee. P disagreed and appealed to the First-tier Tribunal (FTT).

Background

P had been involved in the development of a medical negligence insurance product which C&G marketed. The company needed P’s expertise in the insurance sector and engaged his services following negotiations through a series of communications, mainly by email. There was considerable discussion between P and C&G about the terms of his working arrangement, and some draft contracts were drawn up. These might have helped P’s case but the contracts were never signed.

Working conditions

Eventually it was agreed that P would be paid on a commission-only basis with no salary entitlement. The lack of a regular salary does not alone prove that P was not an employee. The FTT also considered where P’s normal place of work was; this was at his home, in the Lloyd’s building in London or at the offices of various insurance companies he was negotiating with. He had no desk at C&G. However, it did provide him with a computer, other IT equipment and business cards describing him as “sales director”. He also had use of a company credit card. It’s worth noting that HMRC usually cites these factors as good indicators of employment but in practice they don’t carry much weight when compared with matters of control and supervision.

No control or supervision

C&G did not control when or how P worked. Neither did it set protocols to review his work or obtain progress reports, although the latter were provided by P at irregular intervals. The lack of control and supervision over P’s work combined with other less significant factors, e.g. C&G did not enrol P in the pension scheme or give him holiday pay, were enough for the FTT to confirm HMRC’s decision of P’s self-employed status.

Lessons for would-be employers

While ultimately this case was about the worker’s tax and NI position, had the decision gone the other way it might, in theory, have led HMRC to issue demands for unpaid PAYE tax and NI to C&G. In practice, this would have been unlikely because the time limit for issuing such demands had passed. However, it’s a warning for businesses that use freelance workers to nail down their employment status from the start.

If there’s the slightest doubt about a worker’s employment status, the business should use HMRC’s check employment status for tax (CEST) tool, and keep a record of the result and all the paperwork to back up the data input.