Status Cases: Taxpayer 3 - HMRC 0

For years we have seen the status of construction subcontractors challenged by HMRC particularly those operating as labour only subcontractors.

Last year’s pre-budget report confirmed the government’s concern about “false self employment” and the “exploitation of vulnerable subcontractors”. 

Following HMRC’s defeats in Mark Lewis trading as Mal Scaffolding 2007 and Castle Construction in 2008 we see another win for the taxpayer as JL Windows is heard before the Special Commissioners.

Mr J and Mrs C Littlewood traded in Partnership as J L Windows and Doors.  Following an Employer Compliance review HMRC assessed all the subcontractors as employees.  Formal Determinations were raised and subsequently appealed by Mr and Mrs Littlewood and one of the subcontractors, Mr Mark Malloy. 

The Main Facts
There were no written contracts between JL Windows and the subcontractors only verbal discussions regarding the job and the price. 

Subcontractors worked in teams of between two and five people.  The team’s representative was known as a “charge hand”.  Prior to tendering for a job Mr Littlewood would liaise with the charge hand.  The charge hand gave Mr Littlewood a price for the contract after agreeing prices with the other subcontractors on their teams.  How the money was divided among the team members was a matter for the charge hand.  The payment system, however, involved making payments to the individual subcontractors rather than the charge hands so Mr Littlewood needed to know whom to pay and how much.

The majority of the subcontractors were paid "price work", but a daily rate was paid to those dealing with "snagging". Subcontractors took drawdowns on account of the agreed price on the basis of a rate for a day's work. No payment was made for a day or part of a day when a worker was not on site. Any balance of money left once the job was completed was split between the various members of the team on a basis decided by the charge hand. This was referred to as a "bonus".

The right of substitution was never discussed between the parties, however, some of the subcontractors did use helpers to complete the job. JL Windows were aware of this practice and were happy with it. A few of the subcontractors had also asked a family member or a friend to provide the services on their behalf while they went on holiday. Some subcontractors paid the helper/substitute cash in hand and, for convenience, some arranged for J L Windows to make the payment.

Mr Littlewood did not tell the subcontractors how to do the job; he was rarely on site. He would try to visit a site every fortnight. He had up to six jobs all over the country and considered that his role was to see how the job was progressing and to make sure that the subcontractors were taking the correct amount of drawdowns.

The subcontractors were left to choose their own hours but were aware that if the work fell behind schedule the contractors would charge a penalty. As long as the job was "on programme" Mr Littlewood was not bothered what they did. There was no notice period required by either party; the subcontractors came and left as they pleased.

If the subcontractors finished a job earlier than expected and other work was available Mr Littlewood would offer it to the subcontractors. They were free to accept or decline the offer. If the job took longer than expected, and the price to the customer had not been revised, there would be no extra payment.

The subcontractors did not receive any holiday pay or sick pay and there was no grievance procedure.

The subcontractors did not submit invoices; time sheets were provided to Mr Littlewood, by charge hands, for administrative purposes.  They enabled him to see whether particular individuals were working and how much money the subcontractors were taking off a particular job.

J L Windows made the initial payment for training and then deducted it from the amount due to the relevant worker.

Expenses were normally included in the price work.

A client of JL Windows went into administration. The administrator was notified it was owed £213,251.26 and the administrator had indicated that details would be passed to the liquidator when appointed.  JL Windows did not recover any of this debt.  Mr Littlewood notified the subcontractors on site that they should leave the site. They were not paid; this meant that each of the men who had been on the site (about a dozen) had lost between £1,000 and £1,500 for that week.

Special Commissioners Decision
In January 2009, Special Commissioner John Clark made the following comments:

Personal Service: With reference to McKenna J’s comments in Ready Mixed Concrete regarding a limited or occasional power of delegation Mr Clark said “On the evidence the use of helpers can only be described as occasional.  I do not see this as a significant factor in determining the nature of the contracts.”

Mutuality of Obligations: “I do not regard it as necessary in relation to an individual engagement to show that there is an obligation to provide work and an obligation to perform it”. “The worker agreed to carry out the work, and JL Windows agreed to pay the worker for that work. This was as much the case for the Pendant project as for any of the other assignments, even though the contracts were terminated as a result of Pendant going into administration.”   He went on to say “the possibility of termination without notice did not affect the question whether there was mutuality of obligations”.  He found there to be mutuality of obligations within each assignment and explained that mutuality of obligations could not establish the nature of the contract.

Control:The strongest factor in this case was the control factor and it was held that JL Windows did not exercise a sufficient degree of control over the subcontractors to make itself master.  This was sufficient to decide that the subcontractors were not employed under a contract of service and therefore upheld the JL Windows appeal.  Mr Clark accepted that “The control test can be satisfied by the retention of a right of control, although I am not persuaded that control over merely incidental matters is likely to suffice.”

He considered the provision of training and the preparation of timesheets neutral in relation to control. Mr Clark also commented on other provisions that were inconsistent with a contract of service:

• To correct defective work at their own expense was considered to be a minor factor in determining the nature of the contracts but it was more consistent with a contract for services.
  
  
• The expenses and training cost were ultimately borne by the subcontractors, and this was more consistent with a contract for services.
  
  
• The loss of payment when jobs were put off because of bad weather did not influence the decision.
  
  
• The subcontractors did profit if the work was completed early.
  
  
• HMRC argued that the subcontractors had no real business structure. Mr Clark said he did not find these factors persuasive in the context of labour only subcontractors.
  
  
• The only factor Mr John Clark found less consistent with a contract for services was that the subcontractors did not have their own Public Liability insurance and relied on the policy taken out by Mr Littlewood. However on its own he did not find this to be a persuasive factor.
  
  

In this case the judge also commented on the use of HMRC’s notes of meeting and said it was inappropriate to treat the notes of meeting as uncontested accountants of contemporaneous discussions. The meetings in the present case were heard without any professional representation. It was not possible to tell to what extent the answers given were the result of questions being put forward in such a way as to lead the interviewee to give answers in a particular form. He did not disregard the notes of meeting but treated them with caution when deciding what weight to place on the answers given.  Equally he was also cautious of the oral witness evidence given on the day as this was given following professional advice.