Income Tax PAYE Determinations Whether Individual an Employee Determinations Confirmed

Income Tax PAYE Determinations Whether Individual an Employee Determinations Confirmed


Income tax – PAYE determinations – whether individual an employee – determinations confirmed

National insurance – secondary contributions – whether individual an employed earner – decision confirmed

Jurisdiction – “legitimate expectation” – appropriate forum for remedy – whether basis for claim



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Special Commissioner:JOHN CLARK

Sitting in public in London on 22 April 2005

Oliver Conolly of counsel, instructed by Amin, Patel & Shah, Accountants, for the Appellant

Mike Faulkner, Southern England Regional Appeals Unit, Her Majesty’s Revenue and Customs, for the Respondent




  1. This appeal relates to an employment status dispute. The issue is whether during the period from 6 April 1997 to 5 April 2002 a particular individual, Mr Rodney Bone, was (as the Appellant, “Demibourne”, also referred to as “the hotel”, contends) a self-employed person working for it under a contract for services, or (as the Respondent, referred to in respect of all times covered by this decision as “HMRC”, contends) an employee working for Demibourne under a contract of service.
  2. On 16 January 2004 Demibourne appealed against a decision made by HMRC that Mr Bone was to be treated as an employed earner in respect of his engagement with Demibourne for the relevant period, and that it was liable to secondary Class 1 contributions in respect of the earnings from that engagement. HMRC has accepted that the appeal also applies to income tax determinations made in respect of that period.

The facts

  1. The evidence consisted of HMRC’s bundle of documents, which included an agreed statement of facts not in dispute. In addition, witness statements were given by Mr Bone as a witness for HMRC, and by Mr Kevin Halstead, General Manager of the Frensham Pond Hotel, and by Mr A.D. Patel, a director of Demibourne, both as witnesses for Demibourne. All the witnesses also gave oral evidence.
  2. The agreed statement of facts sets out the following information:

(1) Demibourne acquired the Frensham Pond Hotel, located in Surrey, on 16 November 1987. The purchase agreement acknowledged that it was governed by the Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981/1794).

(2) Mr Bone was employed by the vendor of the hotel, and under the sale agreement his contract was transferred to Demibourne. Mr Bone was employed by (and the appropriate deductions were made by) Demibourne until April 1993, when he reached the age of 65.

(3) Between April 1993 and April 2002 he continued working at the hotel, but PAYE was not operated and he was regarded as self-employed.

(4) A Compliance Office of HMRC visited the hotel in January 2002 and expressed the view that Mr Bone was an employee. She confirmed her opinion in a letter of 31 January to Mr Halstead.

(5) Demibourne operated PAYE on Mr Bone’s earnings from 6 April 2002 to 31 January 2004. Mr Bone ceased working for Demibourne at some time around April 2004.

(6) There has never been a written contract between Demibourne and Mr Bone.

(7) Mr Bone undertook all general maintenance for the hotel, including looking after the sewage system. There was no change in the nature of the work that he carried out or the terms and conditions under which he worked after Demibourne stopped operating PAYE.

(8) The Duty Manager at the hotel would show Mr Bone what needed to be repaired or maintained.

  1. There were various conflicts between the evidence of Demibourne’s witnesses and that of Mr Bone. As the outcome of this appeal depends to a considerable extent on the findings of fact, the evidence of each witness is first considered, and findings made after comparing the evidence of all three.

Mr Halstead’s evidence

  1. Mr Halstead had been employed by the hotel as General Manager since November 1992. Mr Bone’s employment ceased upon his attaining 65. Mr Halstead organised a leaving party for Mr Bone, and Demibourne gave him a leaving gift. Following a meeting with Mr Patel, Mr Bone had expressed a desire to continue to offer his services to the hotel on an ad hoc basis. It was explained to Mr Bone that his employment with Demibourne had ceased, as 65 was the age for company employees to retire. Afterwards, Mr Bone worked according to a maintenance list that was provided to him, or worked when called by the hotel; he attended the hotel upon receipt of a call from the Duty Manager or General Manager, or when he saw fit, and provided all his own tools, which Mr Halstead believed were stored in Mr Bone’s car. The ladders (the ownership of which was disputed) were kept in the hotel, and Mr Bone had various other personal items stored there. Following his retirement Mr Bone no longer carried a “bleep” to summon him; he was contacted by mobile phone.
  2. After his retirement Mr Bone had much more jurisdiction over what he did and when he did it. Mr Bone would attend the hotel when he wanted; he frequently used to state (usually the day before an absence) that he was not available for the next few days as he was visiting family or friends or had other engagements. Mr Bone did not claim travelling or petrol allowance or include these in his invoices. He did not work specific shift patterns. Over the years the hotel employed a number of maintenance assistants. There had been occasions when Mr Bone had brought someone in to help him; Mr Halstead could not recall whether Mr Bone had been paid extra when this occurred. Mr Bone provided the hotel with an invoice when he worked. He operated a business and purchased goods for the hotel in his name, although some purchases were made in the name of the hotel and reimbursed to him. He was not paid a specific weekly wage but was paid against invoices submitted for works undertaken. If he came in for two hours, he was paid the day rate, as he was if he stayed late. On submission of his invoices, on which his name and address details were imprinted with a rubber stamp, Mr Bone was paid by company cheque. Mr Halstead was aware that Mr Bone completed his own tax returns and made payments as due. Mr Halstead referred to work which Mr Bone carried out for other persons.

Mr Patel’s evidence

  1. Mr Patel had been a director of Demibourne since 1987. It had purchased the hotel as a going concern, and Mr Bone was one of the employees taken over. The company’s policy was that under normal circumstances an employee would retire on attaining the age of 65. A farewell party was held for Mr Bone, and a gift was presented. Mr Bone had become emotional and asked to continue to work. Mr Patel had offered that Mr Bone could continue, although the hotel had another person already. A negotiated settlement was reached that Mr Bone would provide his services and render bills; he would not be governed by the company, and would be his own master. Mr Patel did not take any advice on this arrangement, nor did he discuss it with the other directors before agreeing it. When Mr Bone’s attendance was required it would be called for on his mobile phone. He would attend the work and raise an invoice. Even if he worked only for two hours, he would be paid for the full day. Demibourne paid these invoices by cheque, whereas employees were paid on a weekly basis in cash, with all the details on their pay packet. After his retirement he did not receive a mileage allowance. The employees worked on a rota system, whereas Mr Bone worked as and when called. Before his retirement he had also worked on the rota system, as a maintenance man. Afterwards the hotel had to call him and tell him about the problems; it had no control of Mr Bone’s hours or the length of breaks that he took. Any time off was agreed with Mr Halstead, not Mr Patel.
  2. Mr Bone used his own tools to provide the services required by the hotel; these tools were always in Mr Bone’s car. To Mr Patel’s knowledge there were none of Mr Bone’s tools at the hotel; they would not have been insured. If particular tools were needed at the hotel, Mr Bone could bring them in the next day. Mr Bone had done work for others; Mr Patel referred specifically to Mr Hone, a garage owner, Mrs Patel (electrical work) and a Miss Tonka, the hotel restaurant manager. In all cases he used his own tools. Mr Patel disagreed with Mr Bone’s statement that he had put in a window at Mr Patel’s house, as triple glazing had been installed. Mr Bone had done other work, for which he had been paid direct, as well as being given food. He had not been paid for an extra day as mentioned in his statement; Mr Patel indicated that he (Mr Patel) had no right to ask for something improper to be done. Invoices would show that Mr Bone had not worked continuously at the hotel, and Mr Patel considered that Mr Bone would have been working for others for the missing periods. (Demibourne sought to produce some of these invoices at the hearing. With the parties’ agreement, I decided not to admit these as evidence, and that I would adjust accordingly the weight to be given to Mr Patel’s evidence on this point; I refer to this below.)

Mr Bone’s evidence

  1. On 7 April 2004 Mr Bone had attained the age of 76. He had started work for the hotel on 2 March 1978, and had worked for it for 26 years. He had been an employee until he reached state retirement age. At that point he had asked if he could continue working, and was told that he could only do so if he was self-employed.
  2. He undertook all the general maintenance work for the hotel, including looking after the hotel’s own sewerage system. He attended every day and worked regular hours; he was always on site during the day, so the hotel only needed to contact him by phone if there was an out of hours emergency. He had obtained a mobile phone in 1996 to avoid disturbance to his wife at home if the hotel phoned during the night. He worked from 8 am to 5 pm but had to stay to complete work if it had to be finished; he was often there until 6 pm. As his hours were regular, his name did not appear on the day rota. He did not ask for overtime payments, but the hotel had on occasions paid him some additional money. He received a flat weekly wage of £255, paid by cheque. If he worked a day less, this was reduced by £51. The timing of his meal breaks had to be fitted in around the work; breakfast and lunch were provided.
  3. He worked on his own. He used all his own tools; he had always done so even when he had been treated as an employee. The majority of his tools were kept on the hotel premises, in a number of locations. (At the request of the hotel he had removed his tools from the basement in April 2004.) None of the maintenance assistants had tools, so they had to use his. When doing ladder work, he needed assistance. He decided what help he needed; they did the simple jobs. He had never introduced anyone to the hotel. He provided his own overalls and protective clothing and had always done so.
  4. He used his own car to get equipment and to go to the bank twice a week to take the takings, bank the latter and collect the wages. He disagreed with the other witnesses’ evidence concerning mileage allowance; initially he had refused it because it was too small, but eventually a rate of 25 pence per mile had been agreed. This was paid in cash and recorded in a book. He had received this more after the age of 65 than before.
  5. If he needed materials, he went and collected them and paid for them on his own credit card. The hotel reimbursed him at the end of each month; Mr Patel checked the bills, and Mr Bone received a cheque. The duty manager told him what needed to be done, and Mr Bone did whatever he was told to do. His work was not really checked; he had been working at the hotel for so long that he knew what to do. He did not do work for anyone else and never had done since starting at the hotel. He did not advertise his services and did not run a business.
  6. He had done work for a Mr Hone, putting in electrical sockets, for which he was paid no more than £30; Mr Hone had done some work on Mr Bone’s car in return. He had also done some work for Mrs Patel, the director’s wife, at their home. This included putting in a new window, a new fuse box, a new supply in to the boiler, and repairing the boiler on a number of occasions. He had been paid for this through the hotel, adding on a day’s work to his normal wages; he referred to an invoice which had been amended. Mr Patel had also paid him a small amount of cash (£20) to cover the cost of the petrol. He could not recall ever doing any work for Miss Tonka Jones. His other part-time work of delivering cars had only started after he had left this hotel and started to work three days a week for another hotel.
  7. Before he was 65 he had had four weeks’ holiday a year. He did not receive any holiday pay or pay for bank holidays from 1993 until April 2002. If he was going to be away he would tell Mr Patel and Mr Halstead. He disagreed with their evidence that he gave short notice of leave. He normally told them some days beforehand, as the hotel depended on him and it was not his character to give just a day’s notice. Once he had been treated as self-employed, he felt that he could not afford to take holidays; he would love to have gone, but finance was a problem. He could have taken time off, but not without asking.
  8. If he could not attend the hotel for any reason, the work did not get done and he did it on his return. He had always done the work himself; there had never been any discussion regarding him sending anyone else in his place. He did not know anyone whom he could send in his place and he had never done so. His terms and conditions of work had not changed throughout the 26 years that he had worked for the hotel.
  9. He regarded himself as self-employed. When HMRC had said that he was an employee, he had been put on the payroll. He had received four weeks holiday entitlement plus paid bank holidays since April 2002. When off the payroll he had never been off sick, but he did not believe that he would have received sick pay. The hotel had operated PAYE on the payments made to him from April 2002 until January 2004, after which the hotel’s accountant had told him that he must be self-employed again. Initially he had not received any wages from the hotel since the end of January 2004, but after he had consulted the Citizens’ Advice Bureau, he received payment by cheque, together with a wages slip showing the amount due and the tax deducted. He confirmed to the tribunal that his tax affairs were up to date.

Findings of fact

  1. In addition to the agreed facts as set out in paragraph 4 above, I find the following facts. Until his retirement, Mr Bone was an employee of Demibourne. Following his retirement he was taken on under an oral contract; the parties considered his engagement to be on a self-employed basis. (The correctness or otherwise of their understanding that Mr Bone was to be treated as self-employed is a matter of law, and is considered later in this decision.) The reason for reaching this agreement was Demibourne’s self-imposed policy of not normally engaging employees over retirement age. In the absence of a written contract, the terms are to be inferred from the course of conduct of the parties. From the transcript of Mr Bone’s duplicate books as set out in the bundle, covering the period from January 1999 to September 2001, it is clear that for most weeks Mr Bone was paid the same amount, £255. For certain weeks no amount is shown, but days worked are totalled; only one week is shown as “leave”. There are certain weeks for which he was paid £306, showing six days worked, and some with the amount of £204, showing four days worked. I find that Mr Bone did work full days for the periods covered by these invoices. I prefer his evidence that he spent whole days working at the hotel. I consider it unlikely that a commercial undertaking would be willing to pay a full day’s rate for two hours’ work carried out by an individual regarded as an independent contractor.
  2. Mr Bone worked according to the maintenance list, and carried out further work as he considered appropriate. He was also summoned by phone when emergencies occurred outside his usual working hours. In practice he had a limited choice as to what work he should undertake, and as to the hours during which he did that work. His name did not appear on the day rota because of his regular hours, although before his retirement he had been on the rota. I accept his evidence that he had limited choice of when to take breaks from working, this being dictated by the necessities of the work to be carried out. As a very experienced worker with detailed knowledge of the hotel’s infrastructure, he could do a great deal of his work without detailed supervision. This had also been the case during his period as an employee before his retirement. I accept his evidence that he did not bring in others to help him with the work.
  3. Mr Bone, in the same way as he had done while an employee, provided his own tools; a number of these were kept on the premises. There was a dispute as to the ownership of the ladders, but as this is a relatively minor matter in the context and so does not affect the general conclusion, I do not consider it necessary to make a finding on this issue. Largely, if not exclusively, he provided his own tools.
  4. Purchases of goods occurred in two ways. For a number of transactions, Mr Bone used his own credit card and was later reimbursed by the hotel after the bill had been checked. For others, the purchase was in the name of the hotel.
  5. Mr Bone issued invoices in respect of each period worked; his details were shown by means of a rubber stamp, showing his name and address followed by the words: “Electrical Plumbing and General Maintenance”. Once each invoice had been verified by Mr Patel, Demibourne issued a company cheque in favour of Mr Bone.
  6. I do not accept Mr Patel’s evidence that Mr Bone did not work continuously at the hotel. My reasons for not admitting the invoices tendered at the hearing were that they should have been provided at a very much earlier stage in order to comply with directions made in preparation for this hearing, and that in any event I was not satisfied that the invoiced in question covered a long enough period to verify Mr Patel’s statement. I prefer Mr Bone’s evidence that his treatment as self-employed without holiday pay resulted in him having to work for a very large part of the time at the hotel, as he could not afford to take much leave. This conclusion is supported by the transcript already mentioned.
  7. I accept Mr Bone’s evidence that he did eventually accept a mileage allowance of 25 pence per mile, which was accounted for separately.
  8. Although there is indirect evidence that Mr Bone did carry out some work for other persons, this was very minor in comparison with his work for the hotel. I therefore do not consider it necessary to make findings relating to the other work or to the basis on which he was paid or rewarded for it. Nor do I consider it appropriate to make findings relating to the invoice mentioned at paragraph 15 above.
  9. Consistently with his understanding of the agreement, Mr Bone reported his earnings to HMRC on the basis of being a self-employed individual, and paid tax accordingly.
  10. Following a meeting on 16 January 2002, Mrs Emblem, an Employer Compliance Officer of HMRC, wrote on 31 January 2002 to Mr Halstead. She concluded that Mr Bone should be treated as employed rather than self-employed. She stated:

“Please note that it is not Revenue practice to charge tax twice and any tax already paid on Mr Bones [sic] earnings will be taken into consideration.”